There are many varying degrees of flexibility. In order to be truly flexible, a mortgage must allow borrowers to do the following:
Some so-called flexible mortgages may only meet a couple of these criteria, while other all-singing, all-dancing mortgages allow you to do much more. So make sure you do your research before you choose the flexible mortgage deal that suits you best.
The vast majority of flexible mortgage borrowers make overpayments on their mortgages. This may seem like a strange concept, but it makes great sense. If you can get rid of your mortgage early you can save yourself tens of thousands of pounds in interest payments. So if you can afford to make some overpayments why not do so? And overpaying by very small amounts can help.
On a £70,000 mortgage charged at 6.20 per cent, giving up a chocolate bar a day and putting the 40p towards your mortgage instead would pay off the debt one year and five months early and save you £4,617 in interest.
And giving up a packet of cigarettes a day and putting eg. £4.20 towards your mortgage would shift the debt nine years and six months early, saving you £28,898.
A truly flexible mortgage will allow you to pay less than the agreed amount - once you have made overpayments. Of course underpaying is not the best idea as it adds to the time it will take to pay off your debt, but it could come in handy in the odd month when your spending is increased.
Some flexible mortgage deals allow you to take a complete break from making mortgage payments for up to a year. This could be useful if you're thinking of starting a family, taking a sabbatical or even going on the cruise of a lifetime. Of course, you have to have built up sufficient overpayments to cover the period you take off. And the terms and conditions will vary. Some mortgage lenders may only let you take a couple of months' payment holiday each year. So check first if you think you might want this option.
Borrowing back overpayments you have made makes perfect sense if you need extra cash. The beauty of mortgage overpayments is that rather than putting any spare cash into a savings account and earning a couple of per cent interest on it, because the amount you over pay is taken off your mortgage you are effectively earning the mortgage rate on your savings. And, with the borrow back facility, it's as though your money was in an instant-access savings account earning that rate. So if you want to buy something costly, or you run into unforeseen expense, the money is at hand.
Redemption penalties do not apply to regular standard variable rate loans - you should be free to chop and change between variable rate loans when you choose as they are not the most competitive rates available. When flexible mortgages were first introduced you could only get them on variable rate loans, so redemption penalties did not apply. Plus while a traditional mortgage lender could charge you a fee if you wanted to pay off a lump of your mortgage (because they had calculated for you paying interest on that lump for a set number of years), that flew in the face of the flexible concept, which actively encourages people to pay off their mortgages as early as possible. Now there are some deals that are truly flexible but do carry short-term redemption penalties. These may be fixed rates or discounted rates, where redemption penalties apply during the special rate period.
Fully flexible mortgages have interest calculated daily, and any payments and overpayments are credited to your mortgage account as soon as they are paid, so you are immediately paying interest on a smaller amount of debt. This saves you money in interest charges that would otherwise add up to a significant sum over a number of years. Traditionally, mortgage interest was calculated and applied annually in arrears, so you would be paying interest on the same amount of debt all year, even though you had been gradually decreasing it during that time.