Mortgages: Open the door to flexible repayments

Shorten the mortgage marathon by overpaying, or take a break when money's tight. Tony Lyons reports

lexible mortgages are the fashionable alternative to the traditional 25-year deal. Mainly aimed at remortgages and those in their thirties and forties, a flexible deal can save you thousands of pounds and knock several years off your mortgage term. Many also allow you to borrow back money you have paid, so they are a cheap way to take a loan.

Most will lend up to a maximum of 90 per cent of the purchase price, or 95 per cent of the valuation if it is a remortgage. There are about 30 lenders offering these deals: since Standard Life Bank introduced its product in January, it has become the fastest-growing lender, with more than pounds 1bn of mortgage business. Traditional lenders, including Alliance & Leicester and Woolwich, have joined the fray.

Flexible mortgages are suitable for anyone who is financially disciplined, but especially for those who earn more at some times than at others: "those with a stable income whose pay is supplemented by irregular bonuses or commission", as Adrian Webb of Virgin Direct describes them.

The basic premise of a flexible mortgage is that it should allow you to overpay on your monthly instalments, reducing the term of the mortgage. Most conventional lenders stipulate a payment of least pounds 500 or pounds 1,000 before they will reduce the outstanding capital and provide you with a new repayment schedule at the end of the financial year. With a flexible loan, you get credit immediately for any overpayment.

As an example, take the case of someone who borrows pounds 70,000 with the Woolwich Open Plan, its flexible mortgage. "Over 25 years, the repayments at 6.64 per cent would be pounds 512.99p a month," says David White of Woolwich. "If there was just a pounds 25 a month overpayment, this would reduce the length of the mortgage to 22 years four months, saving pounds 9,925 on interest compared to a traditional mortgage. Increase the overpayment to pounds 50 a month, and you would reduce the mortgage term to just over 20 years, saving pounds 17,427."

Just as important, by overpaying you effectively build up a reserve that can be used. If you have built up enough credit, you can use this to make the purchase. Some flexible loans allow you to make 10 payments a year, so you can have a payments holiday for two months.

"There are three basic criteria to look for with flexible mortgages," says Patrick Bunton, of London & Country Mortgages, the specialist mortgage broking arm of Chase De Vere, a firm of independent financial advisers.

"They must allow overpayment without penalty at any time; underpayment, payment holidays and drawback of any overpayment; and the interest must be calculated on a daily or monthly basis."

Most flexible loans have a similar rate of interest as the lender's traditional variable mortgage. Some lenders offer fixed, capped and discounted rates. Mr Bunton said that Standard Life, Stroud & Swindon, Egg and Legal & General offered good deals.

Virgin Direct, whose minimum advance is pounds 50,000, goes further than other lenders and offers current account mortgages. But with all these lenders, you get cheque books, direct debit facilities and debit and credit cards.

n Contacts: London & Country Mortgages (part of Chase De Vere), 0800 373 300; Virgin Direct, 08456 000001; Alliance & Leicester, 0345 108108; Egg, 0845 600 0290; First Active Financial, 0345 743743; Kleinwort Benson, 0800 317477; Legal & General Bank, 0870 010 0338; Sainsbury's Bank, 0500 700600; Standard Life Bank, 0845 845 8451; Stroud & Swindon, 0800 616112; Woolwich 0845 6076666.