Flexible mortgages allow overpayments and underpayments
to be made against your mortgage without penalty costs being
incurred. Being able to control when and how much you repay
means that you can overpay when you have spare cash. Conversely,
if you find yourself short of money you can repay less than
you would normally, skip a payment or even borrow money
against the capital repaid.
However, with repayments being under your control rather
than being defined by the mortgage lender, you need to maintain
discipline when repaying a flexible mortgage. Making too
many underpayments, or skipping too many payments without
readdressing the shortfall with overpayments will result
in you having to extend the period over which you repay
your mortgage. This will subsequently increase the amount
of interest you have to repay. In light of this potential
problem, it is advisable to follow this simple rule; Overpay
when you can. Underpay only when you really need to.
Not all flexible mortgages are equal as the conditions
imposed do vary. Some restrict how much you can overpay
during a specified period by setting either a lower or upper
limit on the additional repayment amount. For example, some
lenders will only allow you to make additional payments
over £1000. Some lenders will not allow you to make
an additional payment of more than £100 per month.
Restrictions can also apply to borrowing against the capital
already repaid. In fact, some mortgages labelled as 'flexible'
do not allow you to borrow any money against your mortgage.
If borrowing is permitted you should check how easy it
is to access the cash you require. Do you need to make a
formal request or are you able to simply withdraw cash from
an account? There is a type of flexible mortgage that
helps you to make even more of your money; the 'current
account mortgage'. With this type of mortgage, you current
account balance is offset against the outstanding balance
on the mortgage.
For example, if you have an outstanding mortgage balance
of £50,000 and a current account balance of £1,500,
your mortgage interest will be based on an outstanding balance
of £48,500. Even if you only ever have your monthly
salary paid into your current account, the balance of which
gradually falls as the month progresses, you can still save
hundreds if not thousands of pounds over the period of the
mortgage as the outstanding balance is calculated on a daily
basis. Some current account mortgages also allow you to
combine a credit card and loan with your mortgage and current
account. You can visit About Current Accounts to find further
details about this type of account.
Pros and Cons of a Flexible Mortgage
Advantages You can pay off your mortgage early, without
penalty, by making overpayments. You can borrow against
mortgage overpayments or equity in the property more easily,
and at a lower interest rate than a 'standard' loan. (dependent
on the type of flexible mortgage) You are able to change
mortgage at any time without being penalised as there are
no early redemption penalties. You can benefit from a fall
in the Bank of England's base rate that leads to a subsequent
fall in your lender's standard variable rate.
Disadvantages Making too many underpayments could result
in extending the mortgage repayment period. The Bank of
England base rate can be unpredictable and can increase
rapidly, resulting in an increase in your monthly payments.It
is less easy to budget as the interest rate can and will
vary. A fall in the base rate will not always result in
an equivalent fall in the lender's standard variable rate.
(unless the flexible mortgage offers a tracker interest
repayment)
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