Personal finance: Let's all be flexible

Flexible mortgages are a hit with punters and a miss for old-style lenders.

The traditional 25-year mortgage has been an endangered species for some time, following radical changes to our lifestyles. But its death- knell was finally sounded this week when a new entrant to the mortgage market pulled the rug out from under the rest of the industry.

In just three weeks, Standard Life's Freestyle Flexibility mortgage has attracted applications worth pounds 500m, nearly half the entire monthly lending of all banks and building societies put together, exploding a few key concepts that the major lenders have resolutely clung to.

The first of these concerns their rigid defence of the way interest is calculated, in the face of consumers' complaints that they are being systematically overcharged. The second is that the mortgages they offer meet customers' needs for flexibility. If only a fraction of the applications being processed by Standard Life mature into loans, the mortgage market will never be the same again.

Its impact was underlined yesterday when Britain's two biggest mortgage lenders, the Halifax and the Abbey National, both disclosed that they are actively developing a similar product, though the Halifax has some reservations. The Nationwide is also examining the scope for further flexibility.

The Woolwich, the first of Britain's mainstream lenders to launch a flexible mortgage, revealed that this is now the first choice of nearly half of all borrowers. The Alliance & Leicester, which recently launched its own flexible mortgage, said it had been "overwhelmed" by the response.

The reason these mortgages are popular is because they allow borrowers to overpay in the good times, and underpay, or not pay at all, when life gets tough, without having to crawl on bended knee to their bank manager. Insecurity at work, and the increase in contract and casual employment, make this a vital facility for many.

But for really effective flexibility, interest on these mortgages has to be calculated quite differently from the current method. This has serious implications for computer systems and the finance industry.

Building societies and traditional mortgage lenders have always worked out interest annually. At the beginning of the year they calculate your monthly repayments and your balance remains unchanged until the end of the year, when they do the sums again.

However, when interest is calculated monthly or daily your balance falls during the year, as you make repayments, and your interest bill falls with it. This is particularly important if you wish to overpay, because you will be given credit for this immediately; it may save you thousands of pounds.

Standard Life, which calculates interest daily, estimates that a borrower can slice pounds 2,200 off an pounds 80,000, 20-year mortgage by calculating interest daily rather than annually. A staggering pounds 12,000 can be saved by upping the repayment by pounds 50 a month. Traditional lenders have always fiercely denied that annual calculation costs borrowers more, but there are signs that their defences are beginning to crack.

Alliance & Leicester's mortgage marketing manager, Jeff Sutherland-Kay, is convinced that it is only a matter of time before all mortgages offer flexibility and the choice of monthly rather than annual interest. He says: "Every lender in the country is looking at launching a flexible mortgage, because we know that's what customers want. The world has changed. People no longer wish to make the same repayment over 25 years. They want to pay off more in the good times and less in the bad times, and for their overall interest bill to be cut accordingly - and that means monthly interest.

"I have no doubt that, over time, every mortgage product in the mortgage portfolio will offer this potential, but in the short term there are chronic computer system problems."

The mortgage brokers John Charcol are less sanguine about lenders' motives for sticking with annual interest. A spokesman, Ian Darby, says: "The thing that's holding them back is the cost. There will be one hell of a price to pay if the mainstream lenders are forced into flexibility. If the traditional lenders start charging interest on a monthly or daily rather than annual basis, their balance sheets will take a hammering. We are talking tens of millions of pounds."

In his view, it was the Woolwich initiative that broke the mould: "For the first time you had a mainstream lender offering a competitive range of mortgage options with the flexibility to over- and underpay, and interest charged monthly."

But the Halifax points out that while monthly charging can work in a customer's favour when he is repaying early, it has the opposite impact for borrowers with difficulties.

A spokesman says: "Don't forget, if interest is adjusted monthly or daily, the arrears will climb faster as well."

Start your day with The Independent, sign up for daily news emails
ebooksA special investigation by Andy McSmith
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Neil Pavier: Commercial Analyst

£50,000 - £55,000: Neil Pavier: Are you a professionally qualified commercial ...

Loren Hughes: Financial Accountant

£45,000 - £55,000: Loren Hughes: Are you looking for a new opportunity that wi...

Sheridan Maine: Finance Analyst

Circa £45,000-£50,000 + benefits: Sheridan Maine: Are you a newly qualified ac...

Sheridan Maine: Financial Accountant

£150 - £190 Daily Rate: Sheridan Maine: One of London's leading water supplier...

Day In a Page

No postcode? No vote

Floating voters

How living on a houseboat meant I didn't officially 'exist'
Louis Theroux's affable Englishman routine begins to wear thin

By Reason of Insanity

Louis Theroux's affable Englishman routine begins to wear thin
Power dressing is back – but no shoulderpads!

Power dressing is back

But banish all thoughts of Eighties shoulderpads
Spanish stone-age cave paintings 'under threat' after being re-opened to the public

Spanish stone-age cave paintings in Altamira 'under threat'

Caves were re-opened to the public
'I was the bookies’ favourite to be first to leave the Cabinet'

Vince Cable interview

'I was the bookies’ favourite to be first to leave the Cabinet'
Election 2015: How many of the Government's coalition agreement promises have been kept?

Promises, promises

But how many coalition agreement pledges have been kept?
The Gaza fisherman who built his own reef - and was shot dead there by an Israeli gunboat

The death of a Gaza fisherman

He built his own reef, and was fatally shot there by an Israeli gunboat
Saudi Arabia's airstrikes in Yemen are fuelling the Gulf's fire

Saudi airstrikes are fuelling the Gulf's fire

Arab intervention in Yemen risks entrenching Sunni-Shia divide and handing a victory to Isis, says Patrick Cockburn
Zayn Malik's departure from One Direction shows the perils of fame in the age of social media

The only direction Zayn could go

We wince at the anguish of One Direction's fans, but Malik's departure shows the perils of fame in the age of social media
Young Magician of the Year 2015: Meet the schoolgirl from Newcastle who has her heart set on being the competition's first female winner

Spells like teen spirit

A 16-year-old from Newcastle has set her heart on being the first female to win Young Magician of the Year. Jonathan Owen meets her
Jonathan Anderson: If fashion is a cycle, this young man knows just how to ride it

If fashion is a cycle, this young man knows just how to ride it

British designer Jonathan Anderson is putting his stamp on venerable house Loewe
Number plates scheme could provide a licence to offend in the land of the free

Licence to offend in the land of the free

Cash-strapped states have hit on a way of making money out of drivers that may be in collision with the First Amendment, says Rupert Cornwell
From farm to fork: Meet the Cornish fishermen, vegetable-growers and butchers causing a stir in London's top restaurants

From farm to fork in Cornwall

One man is bringing together Cornwall's most accomplished growers, fishermen and butchers with London's best chefs to put the finest, freshest produce on the plates of some of the country’s best restaurants
Robert Parker interview: The world's top wine critic on tasting 10,000 bottles a year, absurd drinking notes and New World wannabes

Robert Parker interview

The world's top wine critic on tasting 10,000 bottles a year, absurd drinking notes and New World wannabes
Don't believe the stereotype - or should you?

Don't believe the stereotype - or should you?

We exaggerate regional traits and turn them into jokes - and those on the receiving end are in on it too, says DJ Taylor