Lenders for your ups and downs

Clifford German explains the attractions of flexible payment mortgages

Fixed rate mortgage offers might start disappearing, to be replaced by a new and more expensive range as lenders run out of cash secured at summertime rates. But flexible mortgages seem certain to become more popular in future.

Borrowing on flexible mortgages is usually at variable rates, which will go up and down with the general level of interest rates in the economy.

The real flexibility however comes from the ability to vary the amounts and/or the timing of repayments independently of the current rates of interest. As the table compiled by data providers MoneyFacts shows, around a dozen lenders offer various kinds of flexible mortgages.

Borrowers whose earnings fluctuate from month to month - a category which includes contract workers as well as the outright self-employed - can pay what they can afford, and employees who get an annual bonus can use it to pay down debts instead of financing a seasonal spending spree.

Women who need a career break to bring up children can also take advantage of a flexible mortgage to reduce payments in line with reduced earnings and catch up again when they return to work. Anyone still worried about the risk of a rerun of the property slump plunging them into negative equity has the automatic option of accelerating monthly payments in good times to build up a cushion of equity in case the bad times return.

But it is important to choose the right lenders for your circumstances. Most - but not quite all - will allow overpayments; most also allow borrowers to reduce monthly payments for a while, as their financial circumstances change, and some allow interest and/or capital repayment holidays, provided the initial loan has been reduced sufficiently to create some leeway.

Some lenders, including Bank of Scotland, and the Market Harborough, Tipton & Coseley and Stroud & Swindon building societies, also allow borrowers to use the mortgage account as a kind of bank and draw cheques on the account to pay for home improvements, or indeed any other purpose. Most specify a minimum withdrawal of pounds 500, but there are no restrictions on the use the money is put to, as long as the account has built up enough credit to cover the additional borrowings.

The increase itself is not eligible for Miras even if it is within the pounds 30,000 limit eligible for tax relief. But the flexible mortgage is still a very cheap source of credit, well below the cost of a conventional personal loan, or even cash borrowed on gold cards or the new premium current account planned by NatWest Bank.

Flexible mortgages can be combined with an endowment policy, a pension or PEP, but repayment mortgages will automatically create the headroom needed to re-borrow money when required. With endowment, PEP or pension policies which only repay the loan as a lump sum at the very end of the term, it is necessary to make overpayments first, to create the necessary headroom.

The main drawback to flexible mortgages at present is the cost of the underlying loan. Clydesdale Bank offers some fixed-rate flexible mortgages, and First National BS and Mortgage Trust combine flexible mortgages with up-front discounts, although they limit additional borrowing to a bare pounds 50. But the vast majority of flexible mortgages charge a standard variable rate, with no scope for discounted rates, and rely on the flexible repayment facility to keep borrowers loyal.

Only Stroud & Swindon and Tipton & Coseley offer incentives, in the form of cashbacks rather than discounts, and these are repayable if borrowers do not stay for a set minimum time after they have taken the incentive.

rFirstMortgage, one of the mortgage by phone traders, has opened what it calls the first "mortgage supermarket", offering its own mortgages plus the products of 15 other lenders on its panel. It is becoming increasingly difficult for a single lender to be competitive across the whole range of mortgage options, says chief executive Nick Deutsch.

The range is also targeted at busy borrowers who do not want to shop around and will be attracted by a wide choice from a single source. Regulated insurance products are not supplied so an offer can be made in 15-20 minutes, against the 90-120 minutes a full fact-find may take.

Current offers include fixed rates from 1.95 per cent for a year, 4.35 per cent for two years, 6.45 per cent for three years and 7.24 per cent for five years. Variable rates range from 5.95 per cent with discounts of 3.99 per cent for a year up to 1.52 per cent for five years.

What's on offer on the flexible mortgage front

Product name

Abbey National

Flexi-break

Bank of Scotland

via local branch

Mortgage Direct

Centrebank

Personal Choice

Clydesdale Bank

Flexible Repayment Mtg

First National BS (NI)

Mortgage Trust

Early Payment Plus

Homeloans Direct

Flexible Repayment Mtg

Legal & General Mortgage Servs

Mortgage by Design

Market Harborough Building Soc

Mortgage by Design

Mortgage Express

Choices

Stroud & Swindon Building Soc

Flexible Mortgage

Sun Banking Corp

Reflex Mortgage

Tipton & Coseley Building Society

Lifestyle

Yorkshire Bank

Flexible Payment Mortgage

Variable rate %

7.04

6.99

6.49/6.99 and fixed rates

Any variable product

6.45

6.24

6.99

Any product

6.99

6.99

6.24

6.99

Overpayment

No

Monthly. If lump sum, min pounds 500

Yes

Yes

Monthly. If lump sum up to 20% pa

Monthly min pounds 50. If lump sum min pounds 500

Monthly. If lump sum - Ist 4 yrs 10% of o/s balance

Yes. Min pounds 25

Yes

Lump sum - min pounds 750. Max 3 p.a.

Yes

Monthly fixed for 1 yr. If lump sum no min

Monthly underpayment

No

Yes, maximum o/s balance - 6 monthly instalments

No

Yes within available reserve

Yes, set minimum

Yes within available reserve

Yes, fixed for up to 2 years

Yes

No

No

No

Yes, fixed for 1 year

Lump-sum withdrawal

No

Min pounds 500. Max 12 cheques pa

No

pounds 50 within available reserve

No

Yes within available reserve

Min pounds 500

Yes within available reserve

Min pounds 500, max 6 withdrawals in 12 mth period

Min pounds 750, 3 free withdrawals pa then pounds 25 each

Min pounds 1000. 4 withdrawals pa after 3 mths

No

Payment holiday

per year

After 9 mths, up to 8 int free payments in 1st 5 yrs

Yes

No

Yes

No

Yes

Yes after 1st year

Yes

No

No

Max 6 mths after 1st yr

No

Additional notes

Bank of Scotland fee pounds 250. Others no fee

Rate 6.49% if bank's buildings and contents inurance arranged

Available on self-certification, max 75%

Incentives - free valuation and pounds 350 towards costs

3% of adv cash rebate. Free insurance offers. Fee pounds 295

If over 95%, overpayment facility only

3% of adv rebated over 1st 3 yrs. (Rmtgs 2% over 2 yrs). Free valuation/legal costs

Fee pounds 150

Advance pounds 50K-pounds 250K

Fee pounds 150 (inc valuation)

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