Loosen up with a loan that fits

Mortgages need not be straitjackets any more
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The Independent Online

As work and living patterns increasingly fluctuate these days, many of us are becom- ing wary about tying ourselves down. If we suddenly decided to work part-time or job-share, go travelling or relocate to another city for work, the last thing we would want is to be restricted by our mortgage arrangements.

As work and living patterns increasingly fluctuate these days, many of us are becom- ing wary about tying ourselves down. If we suddenly decided to work part-time or job-share, go travelling or relocate to another city for work, the last thing we would want is to be restricted by our mortgage arrangements.

But where there is uncertainty, a flexible mortgage could be the answer. An Australian invention, the first flexible loan in the UK was launched six years ago. Now over 50 lenders offer flexible mortgages.

Although take-up was slow, this type of mortgage is gaining in popularity because it allows borrowers to overpay or underpay, to take payment holidays and pay daily interest.

Current account mortgages are the only truly flexible mortgages. They enable customers to keep all their finances - such as savings and current accounts, overdrafts, personal loans and the mortgage - in a single account. They are becoming increasingly popular.

First Active and Virgin One offer current account mortgages. Last week, both Barclays and Royal Bank of Scotland announced plans to allow customers' salaries to automatically reduce their mortgage payments.

There are other mortgages on the market that don't offer a current account facility but which do have certain flexible features. It is important to check the small print to make sure that you understand any restrictions. For example, some lenders, such as Stroud & Swindon Building Society, set a minimum amount on how much you can borrow back if you have overpaid any money.

If the idea of a flexible mortgage appeals, you need to decide whether it will really suit you. Rather than simply go for the most flexible option, with 12 payment holidays over the term of the mortgage, and the ability to overpay and underpay, as well as make lump sum withdrawals and enjoy the facility of a chequebook, it might be wise to think about whether you need all of these facilities.

The need to address a fluctuating income by overpaying and underpaying as circumstances demand is all most people really need.

"More and more people are being attracted to flexible loans," says Siobhan Hotten at independent mortgage broker Charcol. "They come to us and say they want a flexible mortgage, but the majority only want the ability to overpay because you are paying for the flexible aspects. This can often be better achieved by taking a fixed or discount rate that includes the chance to overpay."

This route is advised because the rate of interest on a flexible loan tends to be higher than on a fixed or discount rate. The First Active Current Account mortgage is an exception. With a 6.5 per cent rate fixed until October 2002, and with no redemption penalties, it is competitive when compared with non-flexible products. At an even lower 5.99 per cent, fixed for a year, is Yorkshire Building Society's flexible mortgage. It then reverts to the standard variable rate, currently 6.74 per cent.

Along with First Active and Virgin One, Halifax's standalone internet bank IF (Intelligent Finance) is at the truly flexible end of the market. The IF mortgage, which has a 1.5 per cent discount for the first six months on a 6.8 per cent standard variable rate, allows customers to keep their finances separate so that they can see exactly how much they owe. But all the separate "pots" - savings and current accounts, credit cards and loans - are taken into consideration when interest is calculated.

Ms Hotten suggests that this might be useful for those who are not so careful with their money. "When your salary goes directly into your [mortgage current] account, if you have been going out quite a lot you could go overdrawn and increase your mortgage debt rather than reduce it without realising," she says.

One of the most attractive features of a flexible mortgage is that interest is calculated on a daily rather than annual basis. So in the long run, you can pay less interest. Even if you spent practically all your salary each month, you could still reduce the interest you pay and shorten the term of the loan.

For example, with a First Active Current Account mortgage, borrowing £80,000 over 25 years, you would get a rate of 7.5 per cent and your minimum monthly payment would be £603.74. If you then paid in a salary of £1,000 a month and withdrew money as you required it, leaving just £20 above the £603.74 payment, you would save £12,753.75 in interest over the term of the mortgage - which itself would be cut by two years and three months.

First Active 0800 550 551 or www.firstactive.co.uk; Stroud & Swindon 0800 616 112; Virgin One 0845 600 0001 or www.virginone.co.uk; Yorkshire Building Society 0870 157 5657.

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