Mortgage Information > Types of Mortgages > Flexible

Flexible Mortgages

Introduced in the UK in the early 1990s - are designed for people who want the option to vary their mortgage payments to match changes in their cash flow. To varying degrees, they let you underpay, overpay, take payment holidays, pay off lump sums and borrow back overpayments.

Unlike some traditional loans that still charge mortgage interest on an annual basis, fully flexible mortgages calculate interest daily, which means that any overpayments you make are immediately credited against your loan, thus reducing your interest costs.

This gives you the flexibility to manage your mortgage payments to suit your cash flow needs as your circumstances change. These Flexible Mortgages allow you to repay capital early, take back some cash you have paid in and postpone payments. Some are run as substitutes for current and savings accounts, so all your money is working to minimise interest on the mortgage.

If you are looking for flexibility in the current mortgage market, there are two important facts to bear in mind. First, the majority of all-singing, all-dancing flexible mortgages tend to charge higher rates than those available on more conventional mortgage deals. "You get the odd flexible deal with a keen rate, but most flexible mortgages are still operating on middling variable rates," says David Hollingworth of independent mortgage broker London & Country.

Secondly, the line is becoming blurred between mortgages marketed as fully flexible and conventional mortgages which are offering an increasing number of flexible features. So unless you want to use the full range of features offered by a flexible mortgage, you may find the level of flexibility you are after on a conventional deal at a much better rate.

Why pay more?

According to recent research by the Council of Mortgage Lenders (CML), the vast majority of people choosing flexible mortgages do so purely because of the potential to pay off their loan early and reduce the overall cost. Only 9 per cent of borrowers, for example, cite the "ability to stop paying for a short time" as a factor that attracted them to the idea of taking out a flexible loan.

"People looking simply for the flexibility to overpay are likely to be better off going for a more conventional deal that allows overpayments without penalty rather than a fully flexible product that in most cases will charge a higher rate," says Hollingworth.

Most major lenders including Abbey National, Halifax, Nationwide Building Society and Cheltenham & Gloucester now let you pay a proportion of the capital off early on all their loans - typically up to 10 per cent a year - without penalty. And this applies even to competitive fixed-rate and discounted deals.

Other lenders are even more flexible on overpayments. All mortgages from Yorkshire Building Society, for example, allow customers to make unlimited overpayments without penalty even during initial special rate periods, provided they don't redeem the last £1 of their mortgage.

Take a break
If you also want the safety net of being able to take occasional payment holidays when financial times get tough, again this option is increasingly available on more conventional deals. But the payment holiday safeguards lenders put in place to ensure borrowers are generally prevented from falling into arrears or negative equity vary considerably from lender to lender. So it is vital to check the terms and conditions of each loan.

A large number of lenders allow payment holidays where the borrower is drawing back on a reserve limit agreed at the time of the mortgage application. If, for example, the lender was willing to give you a mortgage of 95 per cent loan to value (LTV) but you originally only took 85 per cent, there will be a reserve of 10 per cent available.

Some lenders will still restrict you to a certain number of holidays per year, while many will require you to have held the mortgage for a minimum period before you have a break. Nationwide Building Society, which offers flexible features on its entire mortgage range, takes several steps to ensure that payment holidays "are offered in a prudent way". To be eligible borrowers must have had a relationship with the society for more than three years, and have not been in arrears for more than two months at any time in the last two years. Even then they have to apply for payment holidays and discuss their reasons for wanting one. "It is only at the stage where we feel comfortable with the members' ability to make up the payments at a future date that we agree to the payment holiday," says a spokesperson. The maximum break is 12 months, at the end of which the loan must not exceed 80 per cent of the property's value.

There are some borrowers, particularly self-employed people, contract workers and others with erratic income streams that will genuinely make use of the wider range of features offered by fully flexible mortgages. Such loans are best suited to sophisticated borrowers who have the financial discipline to use them wisely.

Flexible Mortgages are sometimes not available to some customers. For example, those with an adverse payment history, those on DSS benefits, those wishing to acquire property which is not their main residence.

There are no standard repayment methods. Each provider will specify the extent of flexibility on its Flexible Mortgage and the interest rate may be variable or fixed.  We will search for the best mortgage for you.

Protecting you and your family's home in a financial crisis is a key factor to consider when setting up a mortgage.