Home in on a flexible mortage

Lenders are at last waking up to their customers' need for less rigid ways to repay the mortgage. By Juliet Oxborrow and Nic Cicutti

Who was it first came up with the notion that a mortgage must be a 25-year financial straitjacket? Whoever it was, those who followed him believe we are still an immutable nation of Cholmondeley-Warners, middle-class buffers for whom the words "excitement" or "changing lifestyle" mean a double helping of spotted dick at lunch.

And underlying this assumption of rigid and unchanging monthly payments, subject only to the occasional vagaries of changing bank base rates, is another, equally old-fashioned idea. It reeks of Fifties-style certainties, of staying in one job for life and never being made redundant. Of coupledom where women aren't important wage-earners in their own right, and it hardly matters if they stop work to bring up a child because the husband will always be there to pay off the mortgage in full.

Of course, that's all nonsense - we know it is. Today, we live in a world where it is highly likely we will work for many employers in our lifetimes, earning varying amounts - sometimes more, sometimes less - able to pay off part of our mortgages in large chunks, or perhaps needing to borrow some of it back on occasion.

None of this is tremendously new. If anything, it is the culmination of two decades or more of social transformation. More surprising is the way, until recently, that the vast majority of mortgage lenders failed to recognise these changes and adjust their products accordingly.

Lenders are moving at last, however. And the product of their own metamorphosis is the flexible mortgage. Over 20 major lenders now offer flexible schemes, although some big names such as the Halifax, Abbey National and Bradford & Bingley have yet to join in.

They work by allowing borrowers to raise and reduce the outstand- ing loan on their home as and when they please.

Reducing the loan, either by increasing your monthly repayments or making ad hoc lump sum payments, reduces the interest paid and can shorten the mortgage term. Many flexible schemes reduce the loan as soon as a payment is made, rather than at the end of the year as often happens, so the easing effect on any debt is immediate.

For example, a loan of pounds 60,000 in which interest is calculated daily rather than annually, would save pounds 6,944 in payments and lop 15 months off the mortgage, assuming a rate of interest of 8.2 per cent.

Meanwhile, the ability to get at the money again, without the usual rigmarole of re-mortgaging, provides a cheaper alternative to other means of borrowing such as personal loans and credit cards. Some providers make it even easier, providing chequebooks, ATM cards and other facilities to make "withdrawals" against a home loan.

A typical example is Legal & General's Flexible Reserve mortgage. Borrowers can make overpayments of pounds 500 or more towards the mortgage (pounds 50 or more on a monthly basis) which reduces the interest on the loan. Overpayments are pooled into a reserve and can be tapped into at a later date. Borrowers can request withdrawals by post, fax or Internet.

"It's great for the self-employed, those working on short-term contracts or anyone with erratic earnings," says Peter Timberlake of Legal & General. "Customers can pay extra towards their mortgage during the good times, safe in the knowledge that they can get at the money to tide them over when they aren't working."

The latest twist are "current account mortgages", which aim to integrate all your banking and borrowing needs. The pioneers of cheque account mortgages are Kleinwort Benson, First Active (formerly Mortgage Trust), and Virgin.

Their key feature is that you pay in your main salary each month (First Active's doesn't require this and leaves the choice to borrowers), which automatically reduces the loan. All usual monthly outgoings are met by writing cheques, making cash machine withdrawals and setting up direct debits, as with any normal bank account. The accounts also come with charge cards or credit cards. Again, one can make additional payments to reduce the cost and term of the loan and take payment holidays.

Financial advisers have mixed feelings about flexible mortgages. Siobhan Hotten at John Charcol, the UK's largest mortgage broker, applauds the fact that interest is calculated daily, so money paid in has an immediate effect on the cost of the loan.

But she has reservations about current account schemes where customers are putting all their financial eggs in one basket: "I feel you would have to be enormously disciplined with schemes where you are getting overdraft and credit card facilities, and so on, to ensure that you pay off the loan."

Ian Giles, marketing manager at First Active, denies this can become a problem: "I have some sympathy for that view. That's why we insist on borrowers paying back an agreed amount each month, so that their mortgage is paid off at the end of the agreed term. The only way people can underpay is if they have built up a credit facility with us."

Virgin offers the most "freedom", stipulating only that the mortgage must be repaid on retirement - but a monthly statement provides a reminder of how near or far customers are from repaying their loan. Kleinwort Benson provides customers with an account manager to help keep their debt on track.

Ian Morgan, an independent financial adviser at RK Harrison, agrees that discipline is needed at times. However, he adds: "Say you pay in your salary on the first of the month, and have mortgage payments and other bills to pay on the 15th; those 14 days that your salary has reduced the size of the loan can have a big effect on how much interest you pay over the course of the mortgage term." In effect, you can cut the cost of your loan by thousands of pounds, simply by setting the date when mortgage repayments will take place.

Mr Morgan adds: "After tax, they are lucky if they getting about 4.8 per cent on a savings account - but they can save about 8.45 per cent on a mortgage, which equates to about 14 per cent gross."

The price for these potential long-term savings is that there are few juicy deals to ease the cost of the mortgage at the beginning of the term. Apart from First Active, which offers a rate capped at 6.99 per cent for two years, very few other firms offer fixes and discounts, charging their full standard variable rate.

Rates may also be tiered, so the more you borrow as a proportion of the home's value, the higher the rate. Virgin's rate ranges from 8.35 per cent on credit facilities of up to 50 per cent of the property's value, to a heady 9.2 per cent on facilities of 95 per cent or more.

Kleinwort Benson charges an 8.2 per cent variable rate, while Legal & General is charging 7.99 per cent. First Active lures borrowers by discounting its variable rate to 7.74 per cent. It hopes to move all its borrowers to tiered rates in the next few months.

Juliet Oxborrow is editor of `Personal Finance' magazine

`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 at the end. For your copy of the guide, sponsored by First Active, call 0800 550551, or fill in the coupon on page four

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