Flexible ways to pay for a home

Click to follow
The Independent Online
Insecurity about jobs is thought to be one of the main problems holding back the property market. People are reluctant to take on a mortgage if they feel that they could lose their job tomorrow.

Furthermore, one in five of the workforce is in temporary employment or self-employed, subject to dramatic income shifts when a contract finishes or a business hits a rough patch. This can make it difficult to guarantee meeting the monthly payments of a traditional mortgage.

Some lenders have taken up the challenge with a range of flexible loans that have been designed to fit in with these employment trends. Many are based on the idea of allowing people to "overpay" their mortgage while they are flush with cash. This enables them either to pay off their mortgage earlier than the initially agreed term or to underpay during periods when they are out of work.

Some, like Market Harborough building society's Mortgage by Design, simply allow limited payment holidays. Bank of Scotland's Personal Choice mortgage allows a wider range of options: payment breaks, underpayments, or simply payments scheduled around your particular income stream. For example, you can budget for your summer holiday by opting for a two-month payment break, instead paying over 10 months the sum you would otherwise pay over a year.

Such mortgages also suit people who earn big bonuses or commissions and want to clear chunks of debt on an irregular basis. Paying off your mortgage early in this way has the added advantage of saving you considerable sums of money. The Yorkshire Bank calculates that if you pay off one of its pounds 50,000 loans in 17 years and four months instead of 25 years you will save pounds 20,000. However, check the terms offered by your lender before overpaying. The Yorkshire Bank reduces the size of the loan, and consequently your future payments, almost immediately. But many lenders will only credit your mortgage account at the end of the month or even less frequently.

Some lenders, including Market Harborough and Stroud & Swindon building societies, Bank of Scotland and Legal & General, the insurer, offer a drawdown facility, which allows overpaying customers subsequently to take cash out from their mortgage account. "The system means that people can pay money back at any time into their mortgage without the traditional fear of compromising their liquidity," says Stephen Smith, the marketing director for L&G mortgages.

Using spare money to reduce your loan will often work out much better value than stuffing it away in a savings account. Standard variable mortgage rates are around 6.75 per cent to 7 per cent, but interest paid on a good savings account is unlikely to be more than 5 per cent gross.

However, there is a catch with most of these mortgages. To have the flexibility to pay off part of the loan whenever you like without penalty will usually mean missing out on the best mortgage discounts.

"Baby-break" mortgages are another type of flexible loan designed to ease your finances when you have a child. Those from Bradford & Bingley and Market Harborough building societies as well as Abbey National all offer discounts that are available when the borrower chooses rather than at the start of the loan. But, in contrast to the flexible mortgages already looked at, they will normally levy penalties for overpayments and early repayments.

Abbey National's baby-break loan gives you three months free of interest, followed by a six-month 3 per cent discount. Bradford & Bingley allows you to take a 5 per cent discount for one year or 2.5 per cent over two years.

Comments