A case of flex appeal

With a flexible or offset mortgage, DIY needn't be a stretch this spring, says Stephen Pritchard
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The Independent Online

Springtime brings with it an upswing in interest in home improvements: the May bank holiday is one of the busiest days in the calendar for DIY stores and builders' merchants. And it is also when more ambitious homeowners start to dust down plans for extensions, loft conversions and other large works.

Springtime brings with it an upswing in interest in home improvements: the May bank holiday is one of the busiest days in the calendar for DIY stores and builders' merchants. And it is also when more ambitious homeowners start to dust down plans for extensions, loft conversions and other large works.

But before they can start work, homeowners need to have finance in place and as often as not this means borrowing. The conventional way to raise funds used to be to take out a personal loan from a bank, to ask the mortgage lender for a further advance, or to remortgage to a different lender and increasing the loan in the process. These choices have been joined by a newer way to borrow: flexible current account and offset mortgages.

Flexible mortgages allow homeowners to make additional repayments into their mortgages and borrow the money back later on. Some mortgages allow buyers to borrow an additional sum - known in the business as drawdown - without the need for a further formal application. Borrowers with current account mortgages can even write a cheque to pay for home improvement work, as long as the total debt stays within the lender's limits.

Offset mortgages take the flexible mortgage a step further, by pooling the loan with savings and sometimes current account balances. As long as there is money in a savings or current account, this is "offset" against the debt, cutting the interest bill. Moneyfacts, the financial research company, lists several dozen current account and offset mortgages on its database, and they all have different combinations of features, fees and interest rates.

The advantage they share over a personal loan or a further advance is that they are quicker to arrange, more flexible and often cheaper, too. Structuring a flexible mortgage to finance property improvements requires careful planning, however. Arranging the main mortgage and any additional borrowing facilities is probably easiest when it comes to buying a new property, since in that case you will be starting with a clean slate.

But the market for remortgages is highly competitive, so homeowners who are on a conventional mortgage, and want to change to something more flexible to pay for improvements, will find plenty of attractive deals available. The key, mortgage experts say, is picking the right features.

According to Ray Boulger, senior technical manager at the mortgage brokers Charcol, borrowers with an offset mortgage will do best by borrowing all the money they need, including the budget set aside for improvements. They can then keep the spare funds in a linked savings account until they need to pay builders' bills. This only works, though, where a lender's offset savings rate is the same or higher than its mortgage interest rate. Most, but not all, are.

For borrowers who are less certain that they will need extra funds for their improvements, a flexible mortgage that offers a drawdown facility is also an option. This, in effect, allows a homeowner to ask for extra funds, and pay the same interest on the money as on the main mortgage. Lenders will usually let borrowers draw an amount up to their standard loan-to-value ratio, as long as the borrower has the income to support it.

The difference between drawing down on a flexible loan and using an offset mortgage is that there is no need to take out the money at the start of the process, and neither is there any need to move savings or current accounts to your mortgage lender. The disadvantage is that it takes longer to arrange than it does to take money from an offset savings account.

Homeowners can also use a flexible mortgage as an efficient way to save cash for improvements. With an offset loan, the money goes into a linkedsavings account, and saves interest at the main mortgage rate. With a flexible loan without an offset account, borrowers make overpayments into their mortgage account. The money saves interest while it is there, and can be borrowed back for improvement work later.

This flexibility is valuable, but using a flexible loan to fund improvements can save money too, especially for smaller jobs. "Most lenders will charge their standard variable rate for home improvements for further advances under £20,000," Boulger says. "Some will charge a 1 per cent premium."

Flexible mortgages are usually cheaper than a lender's SVR. Abbey, for example, charges between 4.55 per cent and 4.85 per cent, according to Moneyfacts. These rates are variable.

But a flexible mortgage might not be the out-and-out cheapest deal: a short-term fixed or discount mortgage may be cheaper overall. "You have to look at the price and features. If you are going to use the features, an offset mortgage will be the most flexible. If not, a flexible mortgage may well do," says Boulger.

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