Money Q&A: New homes for flexi loans

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I am looking for an alternative to my mortgage lender. I am interested in "Australian mortgages", where the interest on the outstanding loan is calculated on a daily basis, but I am told these are no longer available. Is that so?

CM, London

Some UK banks have always worked out mortgage interest on a daily basis. You are charged on what you owe at the end of each day. Interest is immediately based on a lower outstanding balance on the day a capital repayment hits the account.

By contrast, building societies (and former building societies) have traditionally used the annual rest system. Your outstanding capital on one day per year is used to calculate interest for the following 12 months. However, the outstanding capital on which interest is based is also recalculated each time a variable mortgage rate changes (unless you are on a 12-month budget plan) and each time you (the borrower) initiate a change in the mortgage rate by switching to a fixed-rate loan.

Furthermore, most lenders using the annual rest system allow borrowers to make extra capital repayments in addition to their monthly payment. Some lenders put restrictions on the size and frequency of such payments. And you usually have to tell your lender that a specific payment is to be applied to your outstanding debt immediately. Otherwise it may not be registered as a capital repayment but an advance of your monthly payments.

Likewise, simply adding an extra amount to your regular payment doesn't usually reduce your debt immediately. In effect, you are giving an interest- free loan to your lender until the end of its financial year. It is generally better to save your extra monthly payments separately and make occasional specific capital repayments.

But the way interest is calculated (daily as opposed to monthly or annually) is not the only characteristic of "Australian mortgages". They are known in the UK as flexible mortgages, and far from being no longer available, their number is rising all the time. The latest monthly bulletin of MoneyFacts lists 26 lenders in its flexible mortgage section. (For a complimentary copy ring 01603 476747).

These lenders can offer various features in addition to easy capital repayments and a consequent saving of interest and reduction in the length of your mortgage. These may include payment holidays, underpayments and a permanent credit facility as an alternative to a more expensive personal loan. A few products turn a mortgage account into a fully fledged current account with all current account services.

One disadvantage of flexible and current account mortgages is that there may be better discounted, fixed-rate and cashback offers. These deals are generally inflexible, often with long tie-in periods before you can make even partial capital repayments without penalty. But a disciplined borrower and saver could get the benefit of a special mortgage deal and save spare capital on deposit until the penalty period has expired.

Alternatively, and if you envisage making significant capital repayments in the foreseeable future, you could opt for what the Halifax calls a mix and match mortgage. For example, you could take pounds 20,000 of a pounds 70,000 mortgage on standard variable-rate terms and the other pounds 50,000 on a fixed rate. In theory, you could have up to six different mortgage products on one Halifax mortgage. Other lenders offer similar deals.

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