Flexibility is a concept rather than a specific mortgage type. It is possible to have a fixed rate that is flexible or a discount that is flexible. In the UK there is no defined standard of what makes a mortgage product flexible. However, when seeking a flexible deal we would advise that you look for the following features.
- Interest calculated daily
- The ability to overpay the mortgage on a regular basis
- The ability to underpay the mortgage on a regular basis
- Able to make Lump sum payments
- Possibility of running a current account within the mortgage
- Ability to take payment holidays
- No early redemption penalties
Advantages
- More control over the mortgage and if used proactively, can dramatically reduce the number of years you have a debt. Excellent for people who are paid irregular salaries such as commission earners and the Self-Employed.
Disadvantages
- Flexible mortgages don't always have the cheapest rates so usually one needs to be in a position where overpayments are a reasonable certainty to get the most out of this type of product.
Having the ability to regularly overpay your mortgage does not in itself justify choosing a flexible mortgage. Lender’s offering flexible and offset facilities will demonstrate how additional payments will significantly reduce your mortgage term and this is true but it must be remembered that a standard repayment mortgage with a cheaper rate will often work out better in these circumstances.
As an example, if you had a mortgage of £150,000 on a flexible interest only facility at a rate of 6.5% (which is about right for this type of arrangement at the time of writing), then your contractual payments would be £812.50. By paying approximately £300 per month extra the mortgage would finish in 20 years. Alternatively, had you have opted for a traditional repayment mortgage without the same flexibility and qualified for a rate of approximately 5.75%, then the same commitment of around £1115 pm would have meant a mortgage term of just 18 years.
Flexible and offset mortgages certainly have value but hopefully you can see that they are not always the best way of repaying a mortgage early!
Certainly where Flexible and offset mortgages score heavily is in the additional features such as being able to accept ad-hoc overpayments and also the ability to link other savings/current accounts so that the balances offset the mortgage. This is particularly useful for higher rate tax-payers as interest earned in traditional savings mediums (bank and building society accounts) will often be subject to 40% tax whereas conversely using such balances to reduce the interest accruing against the mortgage does not incur any tax liability.
Reserve funds are another brilliant feature of many flexible mortgages where the borrower is able to create a borrowing facility which can be drawn down for future needs. This means that you will only be paying for the money you need as and when you choose to take it.
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