Traditionally, all lenders calculated interest on an annual basis and it was not until 1995 when the “Aussie-Style” mortgage hit the UK mortgage market that this changed. Some lenders still calculate interest on an annual basis but gradually the majority of lenders are now offering some type of daily interest product.
With this new approach to interest calculation, lenders introduced “flexible” mortgages which were designed to allow the borrower to take advantage of paying off the mortgage early and saving money.
However, there is still a lot of misunderstanding (even amongst the lenders) as to what a flexible mortgage is. To be considered truly flexible then the mortgage must offer the following:
- Daily Interest Calculation
- Overpayments (Make additional lump sum payments without penalty)
- Underpayments (Where the borrower has made previous overpayments, the lender will allow a period of reduced payments until the overpayment has been used up.)
- Payment Holidays (Where the borrower has made previous overpayments, the lender will allow the borrower to miss monthly mortgage payments until the overpayment has been used up.)
- Drawdown Facilities (Any overpayments that have been made can be withdrawn from the mortgage at any time. For example, instead of taking a loan to buy a car, the borrower can overpay into the mortgage and then withdraw a lump sum to buy the car outright.)
Care must be exercised when choosing a flexible mortgage as many lenders put restrictions on the level of flexibility that they offer, yet still claim that the mortgage is flexible.
Flexible mortgages offer a number of advantages to the borrower but will not be the right type of product for everyone and will really only be suitable to someone who has the ability to take advantage of the ability to overpay.
Due to the flexible features offered the interest rate charged is generally higher than those mortgages without flexibility and unless you are going to use the overpayment features then it may end up costing you more over the mortgage term.