One of the biggest worries for many people when taking on a large debt, like a mortgage, is what will happen if they run into money problems.
Perhaps it is not as well known as is should be but some lenders do offer some flexibility, allowing the borrower to vary the amount they pay each month – which comes in handy if you suffer an unexpected drop in income or you have to deal with an unplanned expense.
In its most basic form, a flexible mortgage is one which allows the borrower to vary their repayments. This could be through a variety of ways like overpaying your mortgage to pay off the balance quicker, payment holidays, switching to interest-only temporarily, under payments or borrowing back some of the money you may have paid in the past.
While the features mentioned above are quite common place and are offered by most lenders, there are more niche products which offer even more flexibility.
Perhaps the best known is the interest-only mortgage. These can either be bought as standalone products or a lender may decide to allow you to switch to an interest-only mortgage if you run into financial difficulties.
This type of loan arrived in the UK in the late 1980s and slowly became more and more popular – so much so that 1 in 3 loans advanced by lenders just before the crisis was an interest-only loan.
With these mortgages the borrower does not pay back the loan capital but only the interest that is charged on it. Ideally, the borrower would have some way of repaying the capital at the end of the mortgage term – for example: savings, a pension, investments or another method.
These days interest-only mortgages are harder to qualify for, following a clampdown from the Financial Services Authority, the City regulator. Until recently lenders often did not check if the borrower had a valid way of repaying the loan at the end of the term.
But new mortgage rules state that lenders have to check to see if the borrower has a method to repay the loan at the end of the term. Moreover, lenders have also limited what they accept as repayment methods, known as “repayment vehicles” in the mortgage sector. One repayment method which most lenders no longer accept is the sale of the home, meaning you will not be able to sell the home to pay back the money at the end of your mortgage term.
Another popular flexible mortgage is the offset mortgage. Most people believe these types of loans are hideously complicated but in fact they are quite simple. Take, for example, a borrower who takes out a £200,000 offset mortgage a bank. If this person deposited £50,000 with the bank, in its specified offset savings account, interest would only be charged on a net balance of £150,000.
While you won’t earn interest on your savings, the benefits of reducing the interest paid on your mortgage are clear. And at a time when banks are squeezing savers by offing poor rates of interest, an offset mortgage could be a good option to consider.
Many lenders now offer an offset mortgage product, including Yorkshire Building Society, Santander, First Direct and Woolwich, a subsidiary of Barclays. It is also worth remembering that it is not true these products are only suitable for those who receive big bonus payments, like bankers. They are not; offset mortgages can be a suitable and sensible option for most people, especially if they want to pay off their mortgage early.
Mortgages that offer borrowers more choice over how they pay their mortgage have obvious benefits but it can be difficult to decide what type of mortgage would serve you best.
For the best flexible mortgages, tailored to your circumstances, then it is best to see an independent mortgage broker. Independent advisers have the advantage of knowing the lender’s criteria thoroughly and can advise across the entire mortgage market, making it more likely that you will get the best deal.