Some mortgages are more flexible than others and they should allow you to make overpayments and – sometimes – take payment holidays. Find out the pros and cons.
What is a flexible mortgage?
The term ‘flexible’ has become rather overused by the mortgage industry (it’s the equivalent of ‘low fat’ or ‘natural’ on food labels). So flexible mortgages may only have one or two of the features listed below. A flexible mortgage may:
1. Calculate interest daily. This means that as soon as you make a mortgage payment, the outstanding balance is reduced.
SAVVY TIP: These days just about mortgages (whether branded flexible or not) calculate interest daily, so this isn’t something that’s only offered by flexible mortgages.
2. Let you overpay on your mortgage. As a minimum, you’re normally able to overpay 10% of the balance. You should be able to do this as a one-off payment or by increasing the amount you pay each month.
3. Let you underpay. You should be able to make reduced mortgage payments, although you normally have to have overpaid on your loan first. This is a feature that some flexible mortgages may not offer since the credit crunch. Also, there may be restrictions on the reasons why you can underpay (for example, you may not be able to underpay if you have lost your job or are working reduced hours).
SAVVY TIP: Underpaying can mean paying as little as £1 a month. You should be able to underpay until you’ve ‘used up’ the extra money you’ve overpaid.
4. Let you take payment holidays. Some flexible mortgages may let you take a payment holiday of between three and 12 months. Be aware that your mortgage payments will go up once you start paying them again and you’ll owe more interest than before you took your payment holiday.
SAVVY TIP: Before the financial crisis, quite a few mortgage lenders offered this option, but since then far fewer have. If it’s something that’s important to you, make sure you check with the lender or ask a mortgage broker. If they say there is the facility to take a payment holiday, get this in writing.
Flexible mortgages and arrears
It’s worth knowing that you won’t be able to borrow back overpayments or take a payment holiday if your mortgage is in arrears, so you should arrange to borrow back money you’ve overpaid while your account is up to date.
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I have a mortgage with First Active. On being made redundant recently i asked if I could take a payment holiday. No, they said. what about switching the whole of the loan to interest only? No, they said again. i finally mangaed to get them to reduce my £1500 mortgage down to £900 for 3 months, they reminded me that I would have to pay back the arrears when I could, I then realised that I had been overpaying each month for 18 months or so by £200, so this must count towards the arrears. No they said. This seems very wrong. Your mortgage company is happy to take overpayments when things are going well, but they will not take them into consideration should you fall into arrears. Is there anything I can do?
This is a really good illustration of why flexible mortgages don’t always deserve the name. Could you email me some more details (sarah@savvywoman.co.uk)? I’d suggest complaining to the Financial Ombudsman Service, but I’d like to find out if there are any other options first.