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
ebooks
ebooksAn introduction to the ground rules of British democracy
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
SPONSORED FEATURES
Independent Dating
and  

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

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Telesales Executive - OTE £25,000

£13000 - £25000 per annum: Recruitment Genius: Would you like to be part of a ...

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + competitive: SThree: Are you passionate about sale...

Ashdown Group: Graduate Developer (Trainee) - City, London

£25000 per annum + benefits: Ashdown Group: A large financial services company...

Ashdown Group: Marketing Assistant - Financial Services Sector - London

£20400 per annum: Ashdown Group: An established and highly reputable organisat...

Day In a Page

The Silk Roads that trace civilisation: Long before the West rose to power, Asian pathways were connecting peoples and places

The Silk Roads that trace civilisation

Long before the West rose to power, Asian pathways were connecting peoples and places
House of Lords: Outcry as donors, fixers and MPs caught up in expenses scandal are ennobled

The honours that shame Britain

Outcry as donors, fixers and MPs caught up in expenses scandal are ennobled
When it comes to street harassment, we need to talk about race

'When it comes to street harassment, we need to talk about race'

Why are black men living the stereotypes and why are we letting them get away with it?
International Tap Festival: Forget Fred Astaire and Ginger Rogers - this dancing is improvised, spontaneous and rhythmic

International Tap Festival comes to the UK

Forget Fred Astaire and Ginger Rogers - this dancing is improvised, spontaneous and rhythmic
War with Isis: Is Turkey's buffer zone in Syria a matter of self-defence – or just anti-Kurd?

Turkey's buffer zone in Syria: self-defence – or just anti-Kurd?

Ankara accused of exacerbating racial division by allowing Turkmen minority to cross the border
Doris Lessing: Acclaimed novelist was kept under MI5 observation for 18 years, newly released papers show

'A subversive brothel keeper and Communist'

Acclaimed novelist Doris Lessing was kept under MI5 observation for 18 years, newly released papers show
Big Blue Live: BBC's Springwatch offshoot swaps back gardens for California's Monterey Bay

BBC heads to the Californian coast

The Big Blue Live crew is preparing for the first of three episodes on Sunday night, filming from boats, planes and an aquarium studio
Austin Bidwell: The Victorian fraudster who shook the Bank of England with the most daring forgery the world had known

Victorian fraudster who shook the Bank of England

Conman Austin Bidwell. was a heartless cad who carried out the most daring forgery the world had known
Car hacking scandal: Security designed to stop thieves hot-wiring almost every modern motor has been cracked

Car hacking scandal

Security designed to stop thieves hot-wiring almost every modern motor has been cracked
10 best placemats

Take your seat: 10 best placemats

Protect your table and dine in style with a bold new accessory
Ashes 2015: Alastair Cook not the only one to be caught in The Oval mindwarp

Cook not the only one to be caught in The Oval mindwarp

Aussie skipper Michael Clarke was lured into believing that what we witnessed at Edgbaston and Trent Bridge would continue in London, says Kevin Garside
Can Rafael Benitez get the best out of Gareth Bale at Real Madrid?

Can Benitez get the best out of Bale?

Back at the club he watched as a boy, the pressure is on Benitez to find a winning blend from Real's multiple talents. As La Liga begins, Pete Jenson asks if it will be enough to stop Barcelona
Athletics World Championships 2015: Beijing witnesses new stage in the Jessica Ennis-Hill and Katarina Johnson-Thompson heptathlon rivalry

Beijing witnesses new stage in the Jess and Kat rivalry

The last time the two British heptathletes competed, Ennis-Hill was on the way to Olympic gold and Johnson-Thompson was just a promising teenager. But a lot has happened in the following three years
Jeremy Corbyn: Joining a shrewd operator desperate for power as he visits the North East

Jeremy Corbyn interview: A shrewd operator desperate for power

His radical anti-austerity agenda has caught the imagination of the left and politically disaffected and set a staid Labour leadership election alight
Isis executes Palmyra antiquities chief: Defender of ancient city's past was killed for protecting its future

Isis executes Palmyra antiquities chief

Robert Fisk on the defender of the ancient city's past who was killed for protecting its future