Flexibility can have certain drawbacks

Many mortgages now give homeowners much greater freedom but a flexible product may not be the best available deal
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The Independent Online

Banks and building societies may be rushing to promote the new breed of flexible mortgages but we are entitled to ask - what took them so long?

For years homeowners have been bound by mortgages with an unbreakable schedule of monthly payments. Allowing borrowers the freedom to increase or reduce their monthly payments was long overdue.

More than 30 banks and building societies are now using the term flexible mortgage to describe at least one of their products. Lender First Active says 11 per cent of mortgages could be called flexible in 1999, and expects this to rise to 50 per cent by 2004.

Direct Line, Egg, Legal & General and Standard Life offer some of the best-known flexible mortgages and lenders Abbey National, Alliance & Leicester, Nationwide and NatWest have nailed their colours to the flexible mast in recent months.

Patrick Bunton, senior manager with mortgage specialists London & Country, says the move to flexibility has had an impact on more traditional mortgages. "Contracts are getting more competitive. It won't be too long before every mortgage has flexible features."

For most people, the main attraction is the opportunity to make extra payments. Take a £50,000 Cheltenham & Gloucester Flexible Mortgage charging 7.63 per cent over a 25-year term. Increasing the monthly payment from £360 to £400 at the start would clear the mortgage six years early and save more than £14,000 in interest.

Mr Bunton says with a truly flexible mortgage you should be able to overpay at any time without penalty, be free to borrow those overpayments back if necessary and interest should be calculated at least on a monthly basis, or even daily.

The attraction of overpaying on a repayment mortgage is that it reduces the outstanding capital and cuts your interest payments but if interest is calculated annually, you will have to wait up to 12 months before your overpayment is credited. Halifax still uses an annual calculation, Barclays also calculates interest annually on all but one of its product range. Abbey National, Bristol & West, Natwest and Woolwich now calculate interest daily on their flexible mortgages, but annually on their traditional products.

Other flexible features worth looking for are payment holidays and no redemption penalties for changing your mortgage. But be warned: "One flexible mortgage can have completely different features to another," says Mr Bunton.

Royal Bank of Scotland Flexible Choice does not allow underpayments, although it does allow payment holidays of up to six months. Bristol & West Flex 3 sets a minimum threshold for one-off overpayments of £500. Standard Life asks for £1,000 on its Freestyle fixed-rate mortgage. By contrast Direct Line sets no limits for regular or lump sum under and overpayments.

Mr Bunton says another problem with flexible mortgages is that they do not always represent the best available deals. "Flexible mortgages often charge higher interest rates than other mortgages."

He says Standard Life charges a variable rate of 6.95 per cent on its Freestyle variable rate mortgage, with a 1 per cent discount cutting it to 5.95 per cent for the first six months. "You can do better than this on the high street. Halifax has a more attractive two-year discount with no redemption penalties at 5.79 per cent."

His current favourite flexible mortgage is Stroud & Swindon building society's two-year fixed-rate mortgage at 6.29 per cent. "It has no redemption penalties, you can underpay, overpay, draw back overpayments and take payment holidays, all at a competitive rate."

Another attractive deal is offered by Yorkshire Building Society, a one-year fix at 5.99 per cent, fully flexible with no redemption penalty. It also offers a variable rate of 6.74 per cent with a 3 per cent discount for the first six months.

Ray Boulger, technical manager for mortgage specialists John Charcol, warns insisting on a fully flexible mortgage will rule out many attractive discounted and fixed-rate deals. He picks out a mortgage from Market Harborough with a two-year discount of 2 per cent, which cuts the rate from 7.49 per cent to 5.49 per cent, with no extended redemption penalty. Although not a fully flexible mortgage, it does allow overpayments of up to 10 per cent without penalty each year.

Philippa Gee, a financial adviser in Shrewsbury, says flexible mortgages tend to appeal to younger borrowers. "The people who should be considering flexible mortgages are those with greater uncertainty about their financial future. They need the option to reduce or increase their payments,"she says.

Remember flexibility can have drawbacks. If you need the financial discipline of a regular monthly payment and cannot trust yourself to withdraw money on your mortgage, it might be wise to stay well clear.

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