Flexible mortgages are interesting additions to the range of mortgage products you can choose from. You’re used to being told that if you fall behind on payments, you’re at risk of losing your property. A flexible mortgage might go against your instincts, allowing you to make underpayments.
Flexible mortgages allow you to change how much you pay each month, so that you can make overpayments to clear the debt faster. Some also let you underpay for a period of time, with reduced rates or a payment holiday.
With a flexible mortgage, as long as you stay roughly on track, you might be able to underpay and overpay. Some flexible mortgages also allow you to take money back once you’ve paid it. Flexible mortgages give homeowners more control.
With a flexible mortgage, homeowners have a lot more financial control. They can overpay sometimes and underpay at other times, as long as they stay roughly on track. In some cases, you can even choose to borrow money back if you need it.
Read on to find out more about flexible mortgages and how they can be used to buy your home.
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A flexible mortgage is a more relaxed form of borrowing to pay for your home. You’ll be able to make overpayments, contributing more than you’re asked by the lender and reducing the time that you’re in debt for. By overpaying and clearing your mortgage early, you’ll pay less interest overall.
Lenders might also give you ways to underpay, from approved payment breaks to setting upper and lower boundaries for your outstanding mortgage balance. You may be able to overpay one month, then underpay a little the next. Provided you stay on track with mortgage payments, you’ll enjoy a little more freedom.
Lenders make a profit from charging interest, so they need to guarantee they’ll get their money. As a result, most flexible mortgages do have some limits in place. There may be a rule that you can only overpay by up to 10% each month, or you could be given a maximum limit for your annual overpayment total.
In some cases, rather than restricting how much you can overpay at once, a lender might say that you can only overpay on a few separate occasions each year.
If you’ve made overpayments and you’re ahead of schedule, you might be offered a ‘borrow back’ facility. This means that you can access the spare cash that’s available if you later decide that you need it. Maybe you were a little too optimistic?
With a borrow back option, you can withdraw cash that you’d already paid in.
Below is an example of how making overpayments could drastically reduce the amount you end up paying on your mortgage. This is based on a loan of £200,000 over 25 years at an interest rate of 1.25%.
|Standard Repayment||Overpayment||Total Monthly Payment||Interest Saved||Loan Duration|
|£776||£24||£800||£1,203||24 yrs 2 months|
|£776||£50||£826||£2,411||23 yrs 3 months|
|£776||£77 (10%)||£853||£3,571||22 yrs 5 months|
Numbers compiled by Money Savings Advice
By making the maximum overpayment every month with a 10% limit, you can shorten the mortgage duration by almost three years and save over £3,500 in total.
With a flexible mortgage, you might be able to take breaks from making monthly payments. Usually, the interest will continue to mount up, and you’ll end up owing more overall. Some lenders only let you take breaks if you’ve made overpayments to cover them.
A payment holiday could be helpful if you’re temporarily a bit low on money, or if you like to travel and want a break from household bills whilst you go on the trip of a lifetime. With flexible mortgages, your payments are paused – and usually, with no questions asked!
Always make sure that any payment holiday’s approved by your mortgage provider. Just missing a payment without advance warning could be very bad for your credit file.
An offset mortgage is a type of flexible mortgage. You’ll usually hold a savings account with the same financial provider as your mortgage. With an offset mortgage, your savings are available for you to use any time you want. However, the balance in your savings account will be used to offset mortgage charges.
Your savings balance will act in the same way as a flexible mortgage overpayment. Even though this money hasn’t reduced your mortgage balance, the lender will act as though it has. Savings in a separate account can lower your mortgage interest charges, giving you a way to clear your debt early without having to make real overpayments.
To take advantage of an offset mortgage, you’ll need to agree to forego any interest on your savings. You can even link someone else’s savings, with their agreement, of course. Your own parents might agree to give up savings interest, so they can support you to clear your mortgage early without losing their own hard-earned money.
Some offset mortgages aren’t linked to savings but tied to your current account. If you’re planning to apply for an offset mortgage, check what other accounts you’re going to need.
With a flexible mortgage, you need to be aware that interest is always being charged. For as long as you’re in debt, you’re being charged interest that adds to your total mortgage balance. Underpaying and taking payment breaks might be tempting, but they’ll raise the total cost of your mortgage. The same applies if you borrow money back since you’ll be charged interest on that borrowing again.
Flexible mortgages are at their best if you stay ahead of your required payments. If you’re using flexibility to pay less than you should, the cost of your mortgage will rise.
Flexible mortgages can come with higher interest rates than other mortgages. Lenders raise interest rates to cover their losses when customers choose to overpay. If you are regularly overpaying, you’ll easily save money on the total cost of your mortgage.
If you choose a flexible mortgage but then can’t make overpayments, it’ll probably work out more expensive.
Early redemption penalties are fees that you’ll be charged for getting out of a mortgage term early. Often, these high charges far outweigh the benefits of moving your mortgage somewhere else.
Flexible mortgages typically don’t come with penalties for early redemption. If you decide that you’d like to remortgage, you can take your custom elsewhere. You can also move on to a different type of mortgage with your existing provider.
A flexible mortgage requires a good level of discipline. When you’re given the freedom to adjust how much you pay, you need to make sure you stay on track. If you’re tempted by chance to pay less than you should, your mortgage will be so much more expensive.
Flexible mortgages are only suitable if you’re good at managing your money. You’ll need to be able to keep track of your budget and consider how much spare cash you need. Mistakes can be costly. Even making overpayments can leave you struggling financially if you pay back more than you can afford.
You’ll enjoy many benefits with a flexible mortgage, but these benefits may come at a price. Unless you’re able to overpay quite often, there’s a good chance that you’ll pay more for your home overall.
Our online mortgage guides can be used to get to grips with the many types of mortgage available. You can compare the benefits and drawbacks of fixed-rate, variable and flexible mortgages to find the one that best suits your needs.
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