Personal Finance: Free yourself from mortgage slavery

Flexible loans can make life easier and even save you money, says Ben Livesey

MOST of us have mortgage loans set to run over 25 years, and as many people wait until their early 30s before buying their first home, a mortgage is going to be a burden right up to retirement. Some people keep costs down by starting a new 25-year loan when they move to a more expensive property, so payments will drag on even longer.

Until fairly recently, many people simply never considered that they could pay off chunks of the capital they owed. This knocks months or years off the mortgage term, and reduces interest payments.

The banks and building societies (unsurprisingly) never advertised the fact that their borrowers were free to pay off lump sums.

Flexible mortgages have changed all that. The concept - sometimes called an Australian mortgage - was first talked about over here in 1995 when Legal & General launched its Flexible Reserve mortgage. The idea is that you run the mortgage account to suit your own circumstances, overpaying when you have extra cash. Some of your cash is then available to re-borrow as a cheap loan, or you could simply concentrate on paying off the loan.

The big high street names are starting to join in and Woolwich and Alliance & Leicester both have flexible loans.

According to L&G's Peter Timberlake: "There's no reason why any borrower should not take a flexible mortgage. Interest rates on these deals are typically 8.9 per cent against 8.95 per cent for standard variable rates. There is a growing argument that if you are considering a standard-rate mortgage, you should look at a flexible deal. You may find a cheaper rate and extra features you may want to use."

Flexible loans have been slow to take off because many people don't want to pay standard mortgage rates. A few lenders, including the Woolwich, now offer more attractive fixed and capped rates combined with a flexible deal. If you can find extra cash to overpay on a regular basis, then you will see some startling results. For example, Woolwich is offering a 6.69 per cent capped rate for five years. On a pounds 75,000 loan set up for 25 years, you would cut the mortgage to 16 years by paying an extra 5 per cent of the capital back each year during the capped rate period. Regular monthly repayments would be pounds 515.35, and you would need to find an extra pounds 3,750 in the first year, reducing to pounds 2,683 by year five. The total interest saved would be a massive pounds 39,040.

There is also a compelling investment argument for putting more cash into your loan: "If you pay pounds 1,000 in monthly payments, at a rate of 8.5 per cent, but step them up to pounds 2,000 you are effectively crediting your mortgage with an interest rate of 8.5 per cent and it is tax free. To get the same investment return you would have to put your money into an account paying 14.5 per cent," says Keith Sanham, an IFA at Miles Smith Financial Services in London.

Mr Sanham doesn't believe flexible mortgages are for everyone. "If you are looking for a mortgage and intend to pay back large amounts each month then a flexible mortgage maybe for you. But they are geared specifically to the flexible lifestyle, for example, if you have certain future expenses, such as school fees or a wedding, or if there is uncertainty with employment," he says.

If you decide to research the flexible market, be aware that some mortgages are a lot more flexible than others. Yorkshire Bank's Flexible Payment mortgage only allows you to overpay. You can't take the money out again, and you can't miss payments. Look for a deal which gives you a cheque book and the chance to miss payments if necessary.

We may see some standard benchmarks being introduced to define a "flexible" deal, so that it's easier to struggle through the small print. Get a few brochures and decide which deal suits you (see box). Other lenders with well-established flexible deals include Scottish Widows, Bank of Scotland and Sainsbury's Bank.

The heavily advertised Virgin One loan is more than a flexible mortgage. You have to pay your salary into the account (and both partners have to share an account if they jointly own the property, which will put off couples who want to keep their finances separate). You are encouraged to run all your finances as part of the single account, and are sent a "total" statement each month. It's an interesting concept, but only for those who don't get depressed about seeing a bank statement telling them they are technically pounds 80,000 in debt!

The drawback with any re-mortgage deal is that it costs around pounds 1,000 to swap to another lender - and that's before you have paid any penalties for getting out of your current deal. It may make more sense to stick with your current mortgage and find out whether you can make extra payments - many lenders now allow this, even on fixed-rate deals (Bristol & West, Skipton and Northern Rock are among the lenders to allow this). Find out how often the capital you owe is recalculated. Some lenders do this daily, weekly or every month, but most (including almost all building societies) only do their sums at the end of the year. If necessary, save up a lump sum in an instant access account until the end of the year and then pay off a chunk of capital.

Ben Livesey is features editor of 'Moneywise' magazine.

Good flexible mortgage deals

The Woolwich Open Plan mortgage (0845 605 0506) has a five-year capped rate of 6.69 per cent. You can pay back 10 per cent of the loan each year in the fixed period with no penalties. It also offers the option of re-borrowing at an open plan rate of 8.1 per cent. You also get a cheque book and a credit card .

First Active's Current Account mortgage (0345 743743) offers a three- year capped rate of 6.99 per cent. You can repay the loan in full without penalty. It is available on loans up to 75 per cent of the value of your property and has a cheque book and ATM card.

John Charcol (0800 718191) offers a flexible deal with a three-year fixed rate of 6.35 per cent. The loan is offered on up to 85 per cent of the value of your property.

Legal & General Flexible Reserve (01372 364444) has a variable rate of 8.2 per cent and offers a free valuation and up to pounds 350 in legal fees.

Other contacts: Bank of Scotland, 0800 810810; Sainsbury's Bank, 0500 700600; Scottish Widows, 0845 845 0829; Virgin One, 0845 60000 01.