The original flexible mortgage came from Australia and hence was known as the Australian mortgage. The main benefit of this type of mortgage is the facility to pay extra money off the mortgage, enabling the mortgage to be repaid earlier than originally intended. This could save you a considerable amount in interest payments from the reduced term of the mortgage – as shown by the green graph below.
Please note, the graph below is for illustrative purposes only:
It is possible to make overpayments with a ‘normal/non-flexible’ mortgage, but these are often limited to 10% of the mortgage balance each year. So you will need to consider how much you are likely to overpay by before deciding upon a flexible mortgage – as typically flexible mortgage have higher interest rates than non-flexible mortgage. However, they have advantages too, particularly for higher rate tax-payers – see below.
Flexible mortgages tend to come in one of two forms.
- A Flexible mortgage – which allows you to make unlimited overpayments, and usually borrow back money you have overpaid.
- An Offset mortgage – where you have two Accounts with the Lender. One Account with your mortgage balance contained within it, and the other Account is a Savings Account – for which this balance is ‘offset’ against the mortgage balance, meaning you only pay interest on the difference.
Higher-rate taxpayers will benefit more from a Flexible or Offset mortgage as they are likely to be paying a higher rate of interest on their mortgage than they are earning on their savings and therefore could benefit from ‘Offsetting’ their savings against their mortgage. By doing this they do not ‘earn’ interest on their savings (which of course is taxed at their highest marginal rate), so the money can work harder by reducing their mortgage balance, and therefore lowering the mortgage interest charged on their mortgage account!
Many lenders claim to have ‘flexible’ products, but some lenders have products that are far more flexible than others! E.g. Some lenders deem a product as flexible if they offer only the ability to make overpayments without charging you a penalty. However, you may wish to benefit by borrowing back these overpayments if required, or having the facility of a ‘payment holiday’ – and not all ‘flexible’ mortgages will allow these options.
It is very important that if you require flexibility you decide what flexibility you want and make sure that your mortgage product actually offers those aspects of flexibility as standard.
Flexible mortgages usually have a variable interest rate, however Fixed rates are offered too!
allows unlimited overpayments and ability to borrow back overpayments and payment holidays Overpayments can usually be made without the lender charging penalties. Flexibility!
If you don’t make significant overpayments, or offset a significant amount of savings then you may want to consider a non-flexible mortgage and benefit from a lower interest rate.
Top Tip: As always, if you are interested in a flexible mortgage, but want to ensure you get the right one for your circumstances, then please contact one of our expert mortgage advisers today on 01271 346123 and we will be happy to help!