Personal finance: Making a mortgage a flexible friend

No-penalty early repayment, big savings on interest paid, drawdown facilities in an emergency - a new generation of flexible mortgages offers to do things that traditional home loans cannot. Iain Morse looks behind these claims and tries to decide just how different these loans are to the old-style ones.

Barely a day passes without a lender announcing that it has decided to join the flexible loan bandwagon. This new-found love affair with the term "flexibility" is part of a belated recognition by home loan companies that today's borrowers are unlikely to remain in the same jobs for 25 years, with their earnings rising incrementally each year until retirement.

The real question is: just how flexible are such packages? And is it really possible, as many of them are claiming, to save money compared with more traditional mortgages?

One place to start is with the amount you can borrow. Traditional "interest only" and "repayment" loans lend up to a maximum percentage of the value of the property being purchased. This loan to value (LTV) can go as high as 100 per cent for first-time buyers, with most lenders offering 95 per cent as a maximum.

Most flexible loans set this LTV far lower, at 80 per cent of value. According to Ian Darby, marketing director at mortgage broker John Charcol: "This tends to filter out first-time buyers and the less well off. These loans are intended for older professionals, established in careers, with high earnings, and perhaps looking to remortgage."

Flexible loans account for only an estimated 5 per cent of all mortgages taken, offering few discounts or fixed-rate deals. Yet, as Mr Darby points out: "Discounts and cashbacks can account for up to 6 per cent of the value of a conventional mortgage. This is hard to beat."

If there is money to be saved with a flexible loan, it depends on the use borrowers make of any early repayment options, and the basis on which these accounts calculate interest saved by early repayment.

According to Stephanie Jaguer, at Mortgage Express, one flexible loan provider: "Anyone with money to deposit, paying tax on the interest earned, should use their cash to reduce their borrowing. You pay no tax on the interest saved."

It is this "saving" - through the untaxed interest that is no longer paid on the amount of repaid loan - that makes flexible loans good value.

Even a basic-rate taxpayer with money on deposit will be hard put to find net returns better than 3 or 4 per cent. With an average variable mortgage rate at 8.48 per cent, using a cash deposit of pounds 10,000 to reduce borrowing will leave you between pounds 400 to pounds 500 better off.

Figures by UCB Home Loans show that on a loan of pounds 50,000, with flat rate interest of 8.69 per cent calculated daily, repayment of interest and capital over 25 years will cost a total of pounds 122,590. Repayment over 15 years will cost just pounds 89,470, a saving of pounds 33,111. So there are good reasons for making early repayment a priority.

Most traditional mortgages allow early repayment of some or all of the amount owing, but many ask for minimum amounts of pounds 1,000 or more. Mortgage Express will accept far lower minimum repayments of just pounds 25 with their flexible mortgage, with other lenders imposing minimums of pounds 500, and only a minority going up to pounds 1,000.

Early repayment can save you money, but what about the basis on which interest is charged? Most flexible loans levy the lenders' full standard variable rate of interest, but charge interest on your outstanding balance daily or monthly. Much is made of savings from this by comparison to accounts where interest is charged on an annual basis.

On the same terms as above, UCB Home Loans calculates the saving on daily against annually calculated interest over a 25-year term as just pounds 1,485. This becomes more important if during the year borrowers make lump-sum repayments to reduce their mortgage debt. On the annually charged basis, interest payments will not be reduced until the end of the lenders' accounting year, but on a daily basis, there will be an immediate reduction.

Using your cash to reduce mortgage borrowing sounds fine in principle, but may leave you strapped for cash in practice. Most new flexible mortgages will let you borrow money back - this is known as "drawdown" - at standard variable rates.

Virgin's One account offers this facility, and its marketing director Martin Campbell explains its appeal: "Our standard variable rate is cheaper than other sources of consumer credit, and the account will represent a real saving for those using personal loans, conventional overdrafts, and credit cards."

This is certainly true, but one criticism of "drawdown" is that some borrowers will defer paying off their mortgages, and instead use their homes as a source of consumer credit.

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

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

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Compliance Assistant

£13000 per annum: Recruitment Genius: This Pension Specialist was established ...

Ashdown Group: Market Research Executive

£23000 - £26000 per annum + Benefits: Ashdown Group: Market Research Executive...

Recruitment Genius: Technical Report Writer

£25000 - £35000 per annum: Recruitment Genius: A Technical Report Writer is re...

MBDA UK Ltd: Indirect Procurement Category Manager

Competitive salary & benefits!: MBDA UK Ltd: MBDA UK LTD Indirect Procurement...

Day In a Page

Isis hostage crisis: The prisoner swap has only one purpose for the militants - recognition its Islamic State exists and that foreign nations acknowledge its power

Isis hostage crisis

The prisoner swap has only one purpose for the militants - recognition its Islamic State exists and that foreign nations acknowledge its power, says Robert Fisk
Homeless Veterans appeal: ‘If you’re hard on the world you are hard on yourself’

Homeless Veterans appeal: ‘If you’re hard on the world you are hard on yourself’

Maverick artist Grayson Perry backs our campaign
Missing salvage expert who found $50m of sunken treasure before disappearing, tracked down at last

The runaway buccaneers and the ship full of gold

Salvage expert Tommy Thompson found sunken treasure worth millions. Then he vanished... until now
11 best winter skin treats

Give your moisturiser a helping hand: 11 best winter skin treats

Get an extra boost of nourishment from one of these hard-working products
Isis hostage crisis: Militant group stands strong as its numerous enemies fail to find a common plan to defeat it

Isis stands strong as its numerous enemies fail to find a common plan to defeat it

The jihadis are being squeezed militarily and economically, but there is no sign of an implosion, says Patrick Cockburn
Virtual reality thrusts viewers into the frontline of global events - and puts film-goers at the heart of the action

Virtual reality: Seeing is believing

Virtual reality thrusts viewers into the frontline of global events - and puts film-goers at the heart of the action
Homeless Veterans appeal: MP says Coalition ‘not doing enough’

Homeless Veterans appeal

MP says Coalition ‘not doing enough’ to help
Larry David, Steve Coogan and other comedians share stories of depression in new documentary

Comedians share stories of depression

The director of the new documentary, Kevin Pollak, tells Jessica Barrett how he got them to talk
Has The Archers lost the plot with it's spicy storylines?

Has The Archers lost the plot?

A growing number of listeners are voicing their discontent over the rural soap's spicy storylines; so loudly that even the BBC's director-general seems worried, says Simon Kelner
English Heritage adds 14 post-war office buildings to its protected lists

14 office buildings added to protected lists

Christopher Beanland explores the underrated appeal of these palaces of pen-pushing
Human skull discovery in Israel proves humans lived side-by-side with Neanderthals

Human skull discovery in Israel proves humans lived side-by-side with Neanderthals

Scientists unearthed the cranial fragments from Manot Cave in West Galilee
World War Z author Max Brooks honours WW1's Harlem Hellfighters in new graphic novel

Max Brooks honours Harlem Hellfighters

The author talks about race, legacy and his Will Smith film option to Tim Walker
Why the league system no longer measures up

League system no longer measures up

Jon Coles, former head of standards at the Department of Education, used to be in charge of school performance rankings. He explains how he would reform the system
Valentine's Day cards: 5 best online card shops

Don't leave it to the petrol station: The best online card shops for Valentine's Day

Can't find a card you like on the high street? Try one of these sites for individual, personalised options, whatever your taste
Diego Costa: Devil in blue who upsets defences is a reminder of what Liverpool have lost

Devil in blue Costa is a reminder of what Liverpool have lost

The Reds are desperately missing Luis Suarez, says Ian Herbert