Personal finance: Contacts: Get a jump on your home loan
'Australian mortgages' allow you to be flexible, and can save you money. Sarah Jagger reports
Sunday 14 February 1999
So-called Australian, or flexible, mortgages are deals that allow you to make overpayments when you have money to spare. Consistent overpayments will knock years off the term of your mortgage and could save you thousands of pounds in interest.
While most traditional loans from building societies and banks still recalculate what's left to pay off just once a year, flexible lenders recalculate the outstanding capital and interest due on a daily or monthly basis. So you will see the effect as soon as you make extra payments into the mortgage account.
The traditional practice makes more money for lenders but is hard to justify when their computer systems can make monthly or even daily recalculations on their new flexi-deals. Alliance & Leicester and Woolwich are among the big name lenders that operate this unfair two-tier system.
The original Australian mortgage came to the UK in 1994, when the Australian- owned Yorkshire Bank and Clydesdale Bank rolled out the first deals. Both are part of the National Australia Bank Group.
Janice Mack, from Clydesdale, says: "Flexible mortgages are the most popular way to pay off your home loan in Australia. So it seemed a natural step to introduce the flexible mortgage here. Initially, people were sceptical about the benefits, especially the fact that overpayments help you pay off the loan early. Now that people understand how they work, they've proved to be very popular, and account for a third of our mortgage business."
So far, there are 25 lenders in the flexible market, ranging from household names such as Bank of Scotland to the less-known UCB Home Loans.
Flexible mortgages are also called current account mortgages (CAMs), or drawdown schemes. And then there's the Virgin One account, which isn't even called a mortgage.
Get details from several lenders and work out which ones offer the extra features you need. Some allow you to make underpayments or miss payments when finances are tight. They may even allow you to take repayment holidays - a complete break from making payments as long as a reserve amount of money is in your account. Bank of Scotland's Personal Choice, egg and Sainsbury's Bank Options Mortgage are among the deals with this facility.
You can often borrow back some of your overpayments. In effect, you are then drawing on a borrowing facility, repaying it, and taking a loan again. Legal & General's Flexible Reserve operates like an interest- only mortgage, but customers can overpay whenever they want to create an "available reserve", which they can reborrow at any time, either as a lump sum or by taking a holiday from repayments. Maximum borrowing is 95 per cent of the value of your home. Interest is charged at Legal & General's variable rate (currently 605 per cent with a 2 per cent discount for new customers). Incentives include no application fees or redemption penalties, a free valuation and pounds 350 cash rebate for legal costs.
Three lenders offer current account mortgages, which take the idea of a flexible mortgage a step further by offering a home loan combined with a bank account. These allow you to manage your spending, savings, and borrowing in one account. Your total borrowing is set according to the value of your property, the percentage you're borrowing and your income. All the money that comes into the account, for example your salary and income or lump sums from investments, immediately reduces the total borrowing as the interest and outstanding capital is recalculated daily.
This is how the Virgin One account works. You can use it like a current account for all the usual financial transactions including cash withdrawals, direct debits, cheque payments, Switch and Visa cards. And you pay interest at one rate on everything you borrow. But you must open an account with a minimum advance of pounds 50,000 and agree to repay the balance of your loan before you retire, keeping track of repayments yourself. First Active Financial and Kleinwort Benson offer similar products - Kleinwort Benson asks for an annual income of pounds 100,000.
Flexible mortgages have been targeted at the self-employed and people who get bonuses at work. But many people with conventional working patterns and income will also benefit because of the huge savings you can make. And you don't have to overpay huge amounts of cash. Alliance & Leicester calculates that someone with a pounds 50,000 mortgage who paid an extra pounds 175 a day could pay the loan off in 18 years instead of 25, saving pounds 18,130 in interest.
Some lenders also offer flexible deals for people who find it hard to get a standard loan. For example, UCB Homeloans is part of the Nationwide and offers a flexible deal to people who may need to "self certify" their income because it is hard to provide proof of earnings. The rates are not punitive: the current UCB Really Useful Mortgage charges 6.84 per cent interest.
Many flexible deals had a bad press for being expensive. But the market has become more competitive, as Ray Boulger, from independent mortgage broker John Charcol, points out: "For example, Standard Life Bank's Freestyle has dropped its rate to just 455 per cent." That's an introductory deal for six months, but the variable rates are attractive. Alliance & Leicester is charging 6.74 per cent for its branch-based flexible loans and 6.49 per cent to people who deal over the phone. Rates are likely to drop further in line with base rate changes.
Peter Timberlake, from Legal & General, thinks you cannot really lose on such deals. "You get more features with a flexible mortgage, and - even if you don't use all of them - you are still paying an average rate on a flexible loan which is lower than the standard rate."
Sarah Jagger is a staff writer at 'Moneywise' magazine.
beware the 'accelerator' loan
Don't confuse flexible mortgages with the "accelerator" deals offered by salesmen from several firms, including Century Mortgages. These deals also cut the term of your loan, but they charge several thousand pounds.
This month's Which? investigated Century Mortgages and found the firm quoted set-up costs of pounds 2,500, plus a pounds 6.50 management charge each month to run the loan. Which? calculates that if you add these fees to your loan it would put pounds 6,000-pounds 8,000 on the total cost of your mortgage.
Switching your mortgage to a flexible deal would cost much less than this. An average mortgage switch costs around pounds 750, and some flexible lenders offer incentives such as free valuations and legal fees.
Century's salesmen are not trained financial advisers and Which? believes that some of the firm's sales practices it uncovered breach the Mortgage Code of Practice.
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