The flexible mortgage is a relatively new type of mortgage, or at least new in the UK. It was invented and has been used in Australia for many years, but is now growing in popularity in this country as more and more lenders adopt it.
A bit of background
The traditional UK mortgage has been with us for many generations. It was designed with the assumption that people had full time employment and could therefore cope with set monthly payments for a 25 year period. However, as many people have discovered, the traditional mortgage does not always cope well with modern employment trends, such as contract working, self employment, job sharing and part time work.
This is where the flexible mortgage comes in. It has the facility for both over and underpayments built into the loan. What this means is you can overpay your mortgage when finances allow (pay rise, bonus, an inheritance etc.), and then, providing you have made overpayments in the past, underpay when finances are tight (job loss, change in circumstance etc).
A generic example
If you overpay your loan by £50/month for, say, five years on a flexible mortgage, that cumulative amount is then made available as a cash reserve for you to draw on at any time during the remainder of the mortgage term. This cash reserve can normally be drawn on for such things as taking payment holidays or making large purchases. Indeed some lenders actually issue the borrower with a cheque book and encourage them to use the account as an all-encompassing bank account. However the amount you can withdraw is limited by the original sum of the loan.
The main benefit of drawing against your 'mortgage account' is that mortgages usually charge a lower rate of interest than alternative methods of borrowing. However, any potential saving in the interest rate should be balanced with the consequences of possibly repaying the debt over a longer term. Indeed, more total interest may be charged and this would mitigate the positive effects of any interest rate savings you may have received.
If on the other hand, you overpay but never make any withdrawals, you can save a significant amount of interest over the life of the loan. This is because most lenders who offer this type of loan calculate the interest you pay on a daily basis (see what to look for), therefore any overpayment comes immediately off the debt and interest payments are adjusted accordingly.
See Also: Flexible Mortgages: What to look for
We usually charge a broker fee of between 0.5% and 2.5% of the loan amount, this is payable on completion. For example, based on a £100,000 mortgage advance, the fee would be £500 at 0.5% or £2,500 at 2.5%. The percentage charge or total fee will be made clear at the outset. We will also be paid commission by the lender. The actual amount charged will depend on individual circumstances, however typically our broker fee is 0.5% of the loan amount.
YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.