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What do Flexible Mortgages Offer?

Flexible mortgages are, relatively speaking, a newcomer to the mortgage market and are quite different in a number of ways to regular mortgage types.

So what do they offer that other mortgages don’t? Well, as their name suggests, they provide the borrower with a degree of flexibility in terms of how they make the repayments on the advance.

To understand how flexible mortgages work, and the repayment options that the borrower has, you need to know the basis on which the mortgage sits. When initially arranged, a base repayment amount is set – any payments that are in excess of this are said to be overpayments, ones that are for less are said to be underpayments.

Overpayments have the advantage of instantly lessening the amount owed on the mortgage, and as the interest for these types of mortgage is calculated daily this reduces the cost of the interest straight away. There are normally no restrictions on the amount or frequency of overpayments that can be made by the borrower – to the extent that they could pay off the entire mortgage in one go should they wish to, without any penalty.

In contrast, underpayments do have restrictions placed on them. Many lenders will require that overpayments have been made of a sufficient value to cover any underpayments that the borrower wishes to make.

With this in mind, one thing that borrowers can do to ensure that their flexible mortgage affords them the flexibility they desire is to take out the mortgage for a higher amount than they need and then make an overpayment straight away to the amount that they over borrowed. For example, if someone were to require a £200,000 mortgage, they would take one out to the value of £205,000 and then make a £5,000 overpayment on their first repayment. This would then give them a buffer against which to make underpayments should they need to, and as the interest is calculated daily, it will be as though the mortgage were only for the £200,000 needed.

Making the most of the benefits of a flexible mortgage requires discipline – don’t be tempted to make an underpayment just because you can, remember that you are charged interest on the outstanding amount, so the lower you can keep this the better it is for you. Overpay when you can afford to, and only underpay when it is an absolute necessity, this way you will clear your mortgage as quickly as possible and drastically reduce the amount of interest that you pay compared to simply sticking to the basic payments.