A flexible mortgage is a secured loan, which can be paid back in differing amounts while providing access to the housing equity (within pre-agreed limits).
There are five key features with a flexible mortgage: the ability to pay the mortgage off early through overpayments or lump sum payments, the ability to borrow money back by withdrawing lump sums, making underpayments, and having payment holidays. A flexible mortgage gives you more control than with a traditional type of mortgage, and the overpayment feature can significantly save money on your mortgage, for example:
Example 1: £140,000 mortgage, interest rate 6%, mortgage term 25 years.
Monthly mortgage payment was £902 and increased by £50 to £952 – the overall cost saved would be £16,193 and the adjusted mortgage term would be 22.2 years.
Example 2: £100,000 mortgage, interest rate 7%, mortgage term 30 years.
Monthly mortgage payment was £665 and increased by £50 to £715 – the overall cost saved would be £31,193 and the adjusted mortgage term would be 24.2 years
Lump sum payments can also make a significant difference to your mortgage. For example, £150,000 mortgage, interest rate 7%, mortgage term 25 years – if you made a £10,000 lump sum payment after 5 years of having the mortgage, the interest saved would be £26,576.81 and the time saved would be 2 years and 10 months. If you made the £10,000 lump sum payment after 1 year of having the mortgage, the interest saved would be £36,949.05 and the time saved would be 3 years and 8 months (all figures are approximate).
Two additional reasons for making overpayments on your debt with a flexible mortgage are:
Save interest – the interest charged on your mortgage is normally higher than the average savings account. Consequently, it is better to pay off your mortgage with an interest rate of 6.9%, than putting your money into a savings account with an interest rate of 4.3%.
Reduce the capital debt – all the extra payments reduce the capital debt rather than just paying the interest on your flexible mortgage; in the beginning, up to 95% of your monthly mortgage payments goes on paying the interest and only a small amount of your monthly payment is paid on the capital debt.
A flexible mortgage can be tailored to a borrower’s lifestyle and needs as there are different types of flexible mortgages in the market place. Some flexible mortgages can be quite restrictive with no underpayment facility and limited access to overpayments, whereas another type of flexible mortgage can give enormous scope for borrowers’ to deposit and withdraw sums of any amount at any time.
A flexible mortgage has a higher interest rate than a conventional mortgage, but the key selling point for a flexible mortgage is the longer-term savings on interest that can be made by making overpayments and lump sum payments to get ahead in the repayment schedule, thus paying off the mortgage early. In a recent survey of borrowers’ who had a flexible mortgage: 32% had used the overpayment facility, and 90% who had overpaid would do so again. 51% who had not made overpayments were planning to do so in the future. 69% of borrowers’ who had made overpayments had been doing so for more than six months, and 87% intended to continue overpaying until the mortgage was paid off. Most overpayers looked upon overpayments as a long-term plan for clearing their mortgage debt and saving money in the long run.
Although the flexible mortgage is a fairly new type of mortgage on the market, it is becoming an increasingly popular choice for borrowers’, and lenders predict that the flexible mortgage will become more accommodating for borrowers’.
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