Just what is a flexible mortgage? It certainly doesn’t mean you can pay it when you want to! However, it does – as you might have guessed – give you greater flexibility when compared to a normal mortgage.
A flexible mortgage is just a normal mortgage with some extra flexible features bolted on. The features and how they work will differ between providers so it’s important when you’re searching for a mortgage to find one that has the facilities you need.
So, let’s take a look at the features you may get with a flexible mortgage:
Interest calculated daily
Having interest calculated on your mortgage every day is the least expensive way of calculating mortgage interest (in comparison with the other methods of calculating interest: monthly and yearly). That’s because any payments you make are taken into account immediately, and so have a knock-on effect when the lender calculates the amount to charge tomorrow’s interest on.
This is particularly good for a flexible mortgage, as any overpayments you make will make a difference to your mortgage balance straightaway.
Overpaying basically just means that you can make an additional payment, over and above your normal monthly repayment. You can usually make your overpayment either as a lump sum (for instance, using an inheritance to pay £10,000 off your mortgage) or as a regular amount. Regular overpayments can be set up as Standing Orders or by increasing the Direct Debit the lender uses to take your mortgage payment. As overpaying is optional, you can stop making regular overpayments whenever you choose.
Overpaying has the effect of reducing your balance and saving you heaps of interest. It can also mean you’re able to finish paying your mortgage a lot earlier.
Sometimes, particularly if you have an introductory fixed or tracker rate deal, you’ll only be able to overpay a certain amount each year (typically 10% of the mortgage balance). If you decide to overpay by more than this, you will have to pay an Early Repayment Charge.
Payment holiday (or payment break)
Occasionally you may want to have the flexibility in your mortgage to take a payment break, such as for a particularly expensive Christmas, or while you go on a three-month trip around Australia.
Some mortgages therefore offer the option to take a break from payments, which can be anything from one to six months. The length of the break you are allowed can vary so it’s important to check first.
It’s also worth noting that you will still need to apply to take a payment holiday. Your acceptance may depend on how long you have had the mortgage for, or it may be subject to you previously having overpaid enough to cover the payments you will miss.
Although you’re taking a payment break, your mortgage doesn’t. Interest will continue to be charged while you are taking your break, so you could face higher payments when your repayment holiday ends.
In the same way as you can overpay, you may be allowed to underpay. This means you can make a payment lower than your normal monthly amount for a set period.
This will be subject to prior approval by your lender, and in nearly all cases will depend upon you previously having overpaid enough to cover the portion of the payment you are going to miss.
When you overpay, you may not want to lose the use of that money in the mortgage. ‘Borrow back’ therefore allows you to withdraw money that you’ve previously overpaid to use for whatever you want.
While your money is overpaid in the mortgage you get the benefit of paying less interest, but also have the option, should you want it, to take your money out of the mortgage to pay for your wedding, for example, or for a new conservatory.
Because of this, overpaying and borrowing back can be an efficient way of saving, since the amount of interest you could save on your mortgage will, in all likelihood, be greater than you could earn if you put your money into a savings account.
Now, this isn’t technically a flexible option but more of a standalone feature. A mortgage with a portability feature means that if you move you can take your mortgage over to the new property (subject to underwriting checks and a fee). Because you can take your existing borrowing to your new property, it means you wouldn’t have to pay an Early Repayment Charge or remortgage to a new deal.
However, if you reduce your borrowing when you move to your new place you may well need to pay an Early Repayment Charge on what you repay.
If you need to borrow more, the additional amount will probably be charged at a different interest rate to your original loan (so you could end up with two “parts” to your mortgage).
Drop lock (or “switch & fix”)
Droplock, or “Switch & Fix”, is a feature that may be offered on a tracker rate mortgage. This allows you to switch your mortgage to the security of a fixed rate, without paying any Early Repayment Charges or going through a remortgage to another lender.
By having the option of “locking in” to a fixed rate later on, you can take advantage of a low tracker rate but have the flexibility of protecting your rate (by fixing it) should you need to.
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