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.

Susan Sarandon described David Bowie as
peopleSusan Sarandon reveals more on her David Bowie romance
Arsenal supporters gather for a recent ‘fan party’ in New Jersey
sportDidier Drogba returns to Chelsea on one-year deal
Arts and Entertainment
The Secret Cinema performance of Back to the Future has been cancelled again
Life and Style
Balmain's autumn/winter 2014 campaign, shot by Mario Sorrenti and featuring Binx Walton, Cara Delevingne, Jourdan Dunn, Ysaunny Brito, Issa Lish and Kayla Scott
fashionHow Olivier Rousteing is revitalising the house of Balmain
Arts and Entertainment
Christian Grey cradles Ana in the Fifty Shades of Grey film
filmFifty Shades of Grey trailer provokes moral outrage in US
BBC broadcaster and presenter Evan Davis, who will be taking over from Jeremy Paxman on Newsnight
peopleForget Paxman - what will Evan Davis be like on Newsnight?
Life and Style
fashionCustomer complained about the visibly protruding ribs
The new dawn heralded by George Osborne has yet to rise
voicesJames Moore: As the Tories rub their hands together, the average voter will be asking why they're not getting a piece of the action
Dejan Lovren celebrates scoring for Southampton although the goal was later credited to Adam Lallana
newsComedy club forced to apologise as maggots eating a dead pigeon fall out of air-conditioning
Arts and Entertainment
Jo Brand says she's mellowed a lot
tvJo Brand says shows encourage people to laugh at the vulnerable
Life and Style
People may feel that they're procrastinating by watching TV in the evening
ebookA unique anthology of reporting and analysis of a crucial period of history
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

Senior Risk Manager - Banking - London - £650

£600 - £650 per day: Orgtel: Conduct Risk Liaison Manager - Banking - London -...

The benefits of being in Recruitment at SThree...

£18000 - £23000 per annum + Comission: SThree: SThree, International Recruitme...

Test Analyst - UAT - Credit Risk

£280 - £300 per day + competitive: Orgtel: Test Analyst, Edinburgh, Credit Ris...

Trainee Recruitment Consultants - Banking & Finance

£20000 - £25000 per annum + OTE £40,000: SThree: SThree Group have been well e...

Day In a Page

Evan Davis: The BBC’s wolf in sheep’s clothing to take over at Newsnight

The BBC’s wolf in sheep’s clothing

What will Evan Davis be like on Newsnight?
Finding the names for America’s shame: What happens to the immigrants crossing the US-Mexico border without documents who never make it past the Arizona desert?

Finding the names for America’s shame

The immigrants crossing the US-Mexico border without documents who never make it past the Arizona desert
Inside a church for Born Again Christians: Speaking to God in a Manchester multiplex

Inside a church for Born Again Christians

As Britain's Anglican church struggles to establish its modern identity, one branch of Christianity is booming
Rihanna, Kim Kardashian and me: How Olivier Rousteing is revitalising the house of Balmain

Olivier Rousteing is revitalising the house of Balmain

Parisian couturier Pierre Balmain made his name dressing the mid-century jet set. Today, Olivier Rousteing – heir to the house Pierre built – is celebrating their 21st-century equivalents. The result? Nothing short of Balmania
Cancer, cardiac arrest, HIV and homelessness - and he's only 39

Incredible survival story of David Tovey

Tovey went from cooking for the Queen to rifling through bins for his supper. His is a startling story of endurance against the odds – and of a social safety net failing at every turn
Backhanders, bribery and abuses of power have soared in China as economy surges

Bribery and abuses of power soar in China

The bribery is fuelled by the surge in China's economy but the rules of corruption are subtle and unspoken, finds Evan Osnos, as he learns the dark arts from a master
Commonwealth Games 2014: Highland terriers stole the show at the opening ceremony

Highland terriers steal the show at opening ceremony

Gillian Orr explores why a dog loved by film stars and presidents is finally having its day
German art world rocked as artists use renowned fat sculpture to distil schnapps

Brewing the fat from artwork angers widow of sculptor

Part of Joseph Beuys' 1982 sculpture 'Fettecke' used to distil schnapps
BBC's The Secret History of Our Streets reveals a fascinating window into Britain's past

BBC takes viewers back down memory lane

The Secret History of Our Streets, which returns with three films looking at Scottish streets, is the inverse of Benefits Street - delivering warmth instead of cynicism
Joe, film review: Nicolas Cage delivers an astonishing performance in low budget drama

Nicolas Cage shines in low-budget drama Joe

Cage plays an ex-con in David Gordon Green's independent drama, which has been adapted from a novel by Larry Brown
How to make your own gourmet ice lollies, granitas, slushy cocktails and frozen yoghurt

Make your own ice lollies and frozen yoghurt

Think outside the cool box for this summer's tempting frozen treats
Ford Fiesta is UK's most popular car of all-time, with sales topping 4.1 million since 1976

Fiesta is UK's most popular car of all-time

Sales have topped 4.1 million since 1976. To celebrate this milestone, four Independent writers recall their Fiestas with pride
10 best reed diffusers

Heaven scent: 10 best reed diffusers

Keep your rooms smelling summery and fresh with one of these subtle but distinctive home fragrances that’ll last you months
Commonwealth Games 2014: Female boxers set to compete for first time

Female boxers set to compete at Commonwealth Games for first time

There’s no favourites and with no headguards anything could happen
Five things we’ve learned so far about Manchester United under Louis van Gaal

Five things we’ve learned so far about United under Van Gaal

It’s impossible to avoid the impression that the Dutch manager is playing to the gallery a little