Bring all your debts to account

If you like to keep things simple where finances are concerned, a flexible mortgage account could be for you. But look carefully at the options on offer to make sure you get the best deal.
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Indy Lifestyle Online
Think of the many types of financial arrangements we might have to make in the course of our lives - a mortgage, an overdraft facility, a deposit account, a personal loan and a credit card. The chances are that most of us will be dealing with at least two or more providers in relation to these products.

The problem with this way of doing things is not only that it is an exceedingly cumbersome way to sort out one's financial arrangements. Borrowers can also end up paying through the nose for credit.

Few lenders charge less than 15 per cent interest on authorised overdrafts, and most cap the amount they will lend in this way at an amount equivalent to one months' take home pay. If you go over the authorised limit, all lenders impose punitive rates of interest, typically of around 30 per cent.

Unsecured personal loans are also expensive and carry stiff penalties for early redemption. Examples include the Royal Bank of Scotland, charging a hefty 28.2 per cent APR on a loan of pounds 500 to pounds 1,450, with an penalty of 2 months interest for early redemption of the loan.

Flexible mortgages offer an alternative, low-cost route to borrowing by consolidating your debts into one account, secured on the value of your home. The maximum you can borrow will be set as a percentage of its market value.

This allows you to borrow at the standard variable mortgage rate charged by a flexible mortgage provider. These rates range from just 6.69 per cent, charged by Tipton & Coseley, to a variety of variable rates from First Active, ranging between 7.24 per cent and 8.24 per cent, depending on the loan-to-value, or LTV. This makes Tipton look the better deal, but examining the fine print of each loan shows up some important differences.

For instance, Tipton will lend no more than 75 per cent of LTVs, while First Active go up to 95 per cent. Both will allow overpayments, but only First Active allows underpayments. Tipton allows you to withdraw a minimum of pounds 1,000 just three times a year. Meanwhile, First Active offers a full banking service, including cheque book, card, and credit card with no minimum limit on withdrawals.

This shows that some flexible mortgages stretch further than others. If tempted, set out to make a comparison between flexible loans, and find the one most suited to your individual circumstances.

The attraction of some flexible home loans is that they also allow borrowers to operate a mortgage like a bank account. This type of arrangement is proving to be increasingly popular.

Mark Cohen, 38, works in the City and writes part-time. Being a writer is no easy matter. There is the creative tension involved in crafting the perfect novel. Then comes the problem of how to plan one's financial affairs so that sums of money coming in irregularly can be used to meet regular outgoings, such as monthly mortgage payments.

Mr Cohen believes he has found the answer to this problem. Last year he opened a flexible mortgage bank account into which he pays his salary from his main job with a leading city firm. He also paid in the advance he received from his first novel, Brass Monkeys, a tale of political intrigue now out in paperback.

Mr Cohen, who lives in London, says: "It has been a tremendously useful exercise. Not only am I paying off my mortgage far faster than would normally be the case, the advance on my novel has helped me reduce my debt still further. While it is there I am effectively earning a far higher rate of interest, after tax, than any other commonly available type of deposit account. But if I should ever need any of that money, it is still available to use."

Since opening the account he has used it as a normal account. "I write cheques and use ATMs, and control all my finances from it. I have never found a problem using my cheque card - there are so many different types of card nowadays."

There are three current account mortgage providers, where cheques, cash cards and, in some cases, credit cards are available to customers as part of an all-in-one package: First Active, Kleinwort Benson and Virgin Direct's One Account. Virgin Direct offers rates ranging between 6.6 per cent on LTVs of 50 per cent or less, and 7.45 per cent for loans of up to 95 per cent of a home's value. Kleinwort Benson's rate is 6.45 per cent on a maximum LTV of 80 per cent.

Kleinwort Benson: 0800 317477; First Active Financial: 0345 743743; Virgin One: 08456 000001

n `The Independent' is offering a free 36-page `Guide to Flexible Mortgages', with tips on all aspects of home loans, including how much you can borrow, how to repay the mortgage and a list of useful names and telephone numbers. For your copy of the guide, sponsored by First Active, call 0800 550551

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