Is your mortgage your flexible friend?
Julia Harris, senior mortgage analyst at moneyfacts.co.uk comments:
“For most of us, our mortgage will be the largest and longest financial commitment of our working lives, with the much anticipated final repayment seemingly light years away.
“The term of our mortgage will often have been agreed years ago, for a term which at the time will have been calculated to ensure repayments were affordable. But as we go though life our financial circumstances will undoubtedly change, so if you can afford to, why not take control of your mortgage and increase your monthly repayments?
“While more of us than ever before regularly shop around to find the best mortgage deal, in the meantime we could also be making the most of flexible mortgage deals to repay the debt earlier without actually contractually committing to higher repayments.
“Many of today’s mortgage lenders will promote the fact their mortgage is ‘flexible’ as a key selling point. But with over 8,500 mortgage products available, through over 125 lenders it is inevitable that lenders will use different features to define their mortgage as flexible. So what can flexible mean?
Overpayments
“Research by moneyfacts.co.uk has found that only five lenders will not allow overpayments on any of their current mortgage range, with many more only offering this facility on selected products.
“Typically during the deal period, the lender will restrict the amount that is overpaid, either by a maximum monthly figure or around 10% of the capital owed, and anything greater will incur an early redemption charge.
Fully flexible
“Moneyfacts.co.uk defines a mortgage to be fully flexible if it allows underpayments, overpayments, repayment holidays and charges interest on a daily or monthly basis. But even within this definition that can be variations dependent on the lender and product chosen.
“Some lenders will only permit underpayments and repayment holidays up to the value of any overpayments previously made, while others may be less restrictive.
“49% of lenders listed on moneyfacts.co.uk offer fully flexible products.
CAM/Offset
“The current account / offset mortgage market has grown fourfold over the last five years, with over 30 lenders now offering a range of competitively priced products. If used appropriately they can be the ultimate in flexible mortgages, allowing your term to be reduced and providing tax saving opportunities, particularly for the higher taxpayer.
“So while underpayments and repayment holidays can be a great lifeline in times of financial difficulty, the main benefit of a flexible mortgage is the ability to overpay without penalty.
“Anyone with a flexible mortgage who has any spare savings that could be invested into their mortgage would be well advised to consider this. Take for example the scenario below, it just shows how a small extra contribution could your reduce mortgage term.
Example based on a £130,000 capital repayment mortgage over 25 years at 5% interest.
Normal repayment = £759.97 per month |
||||
No of years mortgage term reduced by |
New mortgage term |
Monthly payments required |
Overpayment per month / week |
Total interest saved |
1 |
24 |
£775.97 |
£16 / £3.69 |
£4,511.64 |
2 |
23 |
£793.53 |
£33.56 / £7.74 |
£8,976.72 |
3 |
22 |
£812.86 |
£52.89 / £12.21 |
£13,395.96 |
4 |
21 |
£834.23 |
£74.26 / £17.14 |
£17,765.04 |
5 |
20 |
£857.94 |
£97.97 / £22.61 |
£22,085.40 |
Moneyfacts.co.uk |
||||
“Overpaying just £16 per month in this example would knock a whole year off the mortgage term. That’s say the equivalent of going without one shop-bought sandwich meal per week. And if you could afford an extra £97.97 per month, this would reduce the mortgage term by a massive five years, saving you a whopping £22K in interest.
“Flexibility can also be a vital factor in properly controlling any further advances, especially those taken to repay unsecured debt. While adding unsecured debt to your mortgage will undoubtedly lower your monthly repayments, the total charge will be very much higher. Take the example of £25K: repaying this on an average personal loan over 10 years charging 6% APR would cost £257.56 per month, and cost £8,067.20 in interest. While adding it to a mortgage, still paying 6% would lower the monthly repayment to £161.08 per month, but over a 25 year period interest of £23,324 would be payable, repaying in total almost double the original debt.
“So by using the flexible features of a mortgage, your commitments could stay low, but by making additional voluntary repayments at times convenient to your financial situation, you can be in a position to manage your own debt levels and repayment times.
“As mortgage balances and terms become larger burdens, if you can afford to make even the smallest of overpayments, it will help reduce your mortgage terms and could save you thousands in interest. But if you are looking for a flexible mortgage, make sure you know the exact terms, as lenders conditions vary dramatically.”
NOTES TO EDITORS:
Moneyfacts Group
Moneyfacts is the UK’s leading independent provider of personal financial information and our data is used and trusted throughout the financial industry.
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