When mortgages were first introduced, borrowers had a ‘job for life’ with a regular salary. People’s working habits today are not so straightforward. More and more work on flexi-time, or from home. People take career breaks and women are taking maternity leave and going back to work afterwards. Millions of people take home a variable amount of pay each month and many also get paid a bonus or performance related pay.

To keep up with these changing circumstances at work, consumers are demanding more from their repayment mortgage products than the traditional inflexible products. Mortgage lenders are introducing some flexibility to their plans to suit individual needs.

Flexible, or lifestyle, mortgages were introduced to the UK in the mid 1990s from Australia. In fact they are still sometimes referred to as ‘Aussie’ mortgages. They are now among the most popular products on the market.

In order to call a mortgage flexible, a lender needs to have addressed competitive interest rates which are calculated daily, minimal fees and no tie-ins. It should have the option to pay the mortgage off when it suits the customer without an early redemption fee. You should be able to take payment holidays or to overpay at any time with no charge. It should also offer a drawdown facility which allows you to effectively remortgage to release cash without having to fill in any forms.

The main selling point of a flexible mortgage is the ability to pay it back early with no penalty charge, therefore saving thousands of pounds worth of interest payments. If you make regular overpayments or pay in a lump sum and your interest is calculated daily, then the effect of the overpayment can be felt immediately. Traditionally interest was charged monthly or annually, so you would be paying interest on the same capital amount for up to a year even though the amount that you owed had decreased. Most flexible mortgages will still have an early redemption fee for a short amount of time at the beginning of the loan period to cover set up costs but this should not be for a long period.

You can use a flexible mortgage as a form of savings account if it has a drawdown facility. This is a much more cost effective way of saving for home improvements or taking out a personal loan. Whilst your overpayments are in the mortgage account, you are paying interest on a smaller capital amount. You can then take the money back and still have saved yourself paying a substantial amount of interest whilst your money was in the mortgage. Using this facility makes your money work harder for you.

Being able to overpay or take payment holidays is of particular interest to anyone who is self employed and whose income fluctuates. It is better to make up for any lost ground when taking a payment holiday by overpaying when possible, as the rate at which the loan is being paid off is slowed down.

It is not only the self employed who would benefit from the ability to take a payment holiday. This is useful if you want to start a family and need to use the money freed up from the mortgage to buy all the necessary baby equipment. It can be used if you want to spend a significant period of time travelling. Most lenders will ask you to build up a series of overpayments to compensate for the payment holiday.

Advantages

You can overpay any amount into your mortgage at any time. This can knock years off the full term of your mortgage.

Interest is calculated daily, so any overpayments have an immediate impact on the amount of capital that you owe.

You can underpay and take payment holidays.

You can have a drawdown facility to take back excess payments that you have made.

There should be no redemption penalties after an initial short set up period.

Disadvantages

The level of flexibility is not standard, so different products will have a different set of flexible components, so each must be thoroughly researched and understood.

Flexible mortgages do not usually have the most competitive interest rates, so you need to look at the long term picture and do a comparison with a standard mortgage product to find out whether it is the best deal for you.

Although you can pay off your mortgage much faster if you overpay, the reverse is true if you underpay. You will need to compensate for any underpayments to stay with the original payment schedule.