Flexible mortgages are fairly new to the UK mortgage market, having been introduced by lenders in the early 1990s. These mortgages are designed for homebuyers who want the option or flexibility to vary their mortgage repayments to match their cash flow patterns. With flexible mortgages, the lender will let you pay less – underpay – or pay more – overpay – your mortgage to a certain degree. In some cases you can also make lump sum payments or even borrow back overpayments.
Although there are numerous differences with traditional mortgages, the largest difference with flexible mortgages is the way the interest is calculated on the loan. In traditional mortgages, the interest is calculated on an annual basis, however, in flexible mortgages, interest is calculated on a daily basis. This means that any overpayments you make on your monthly repayment are automatically credited against your loan, reducing your overall interest payments.
Flexible mortgages are advantageous for those people who may have irregular incomes, such as self-employed people or salespeople, who get paid in bonuses rather than regular salaries. For such people, the potential of being able to pay off the mortgage sooner than the maturity is also a factor that attracts them to a flexible mortgage.
However, flexible mortgages are also popular among younger homebuyers or first time home buyers, who want to have the flexibility of not paying or underpaying their mortgage payments, if they decide to use their income for something else.
However, flexible mortgages tend to carry higher interest rates compared to traditional mortgage due to the extra service the borrower is getting. Taking this into consideration, it would make sense for any home buyer looking to apply a flexible mortgage to their loan to look again. This is because many traditional mortgages now offer many flexible characteristics and are giving flexible mortgages a run for their money. For borrowers, it will be important to decide which features are most important to them and weigh the options and costs between a traditional mortgage and flexible mortgage.