Personal Finance: Save for a baby break

Flexible mortgages may hold the key.

NONE OF us grudge spending money on our children, but the cost of a baby break can hit hard at family finances. For many households, the single most expensive item of monthly expenditure is a mortgage payment. Having a home loan sufficiently flexible to help cope with this change in circumstance seems sensible.

Women now account for 44 per cent of the workforce and more than one third of these have children aged under 16. Estimates vary, but the average cost per household of a nine-month baby break has been put at pounds 9,000.

While recent changes in the law guarantee a minimum level of both maternity leave and pay, this applies only to those who are employed. For those who change jobs more often (often women), do part-time work, or have been with an employer for less time, benefits can be small.

Traditional mortgages are rigidly structured, with no facility for over- or under payment. If you have one, the only solution to saving for a baby break is to open a deposit account. But the interest you receive then is paid net of your marginal rate of income tax. Average gross returns for pounds 10,000 on 90 days deposit are 5.5 per cent, falling to 4.24 per cent for a basic rate taxpayer and just 3.3 per cent for anyone paying the higher rate. Those rates are falling.

With current average mortgage rates at least 1.2 per cent higher, you will immediately save more interest than you can earn by paying extra cash into a flexible mortgage. New flexible mortgages have come to the market, some allowing both over- and under-payments. Providers such as First Active, Legal & General, Virgin One and Standard Life have developed loans that allow you to overpay, then borrow back the surplus you have built up.

Simonne Gnessen, 33, works as an independent financial adviser with Fiona Price & Partners, a London-based firm. She says: "Right now I'm thinking about re-mortgaging. The key to good financial planning is to pick an option that meets as many changes of circumstance as possible. I have to consider the possibility of having children and any reduction in earnings resulting from this. But I also have to think about unforeseen career changes," Gnessen adds.

"The benefits of flexibility need to be balanced against other types of mortgage, such as capped, fixed or discounted loans. These may be cheaper, but do not necessarily provide all the facilities of a flexible mortgage.

"Flexible loans can be ideal for young high earners who have a basic salary with big bonuses. They can pay in bonuses now, then borrow back some of this later if needed. This could be very useful during maternity leave."