mortgage guide

There has been a lot of talk recently about this new breed of mortgage and they look set to become increasingly popular. A look at the 'Useful Contacts' section at the end of this book will tell you which lenders are offering these products currently. However, I would like to spend a little time here explaining how they work in general terms and the advantages of such products.

The first point to remember is that these products are not interest rate driven. They are generally designed to offer a competitive variable interest rate but with other facilities attached which in some cases are designed to give a one stop mortgage/savings account/bank account rolled into one. Below I explain the various different features that may be found in one of these mortgages but not all products will contain all the facilities listed below. However, most products will contain a mix of several of these features.

Drawdown Facility

Many of these products will enable you to draw additional lump sums from your mortgage as and when you need them. These additional sums are then added to your mortgage debt and interest charged accordingly. The lender will usually set a predefined limit up to which you can borrow and they may in some cases give you a cheque book to use in order to draw down these funds.

Part Repayment Without Penalty

Most Flexible Mortgages will allow you to pay off lump sums at any time without penalty. Indeed some even include the facility to have your salary credited to the mortgage account each month. This, used in conjunction with the drawdown facility makes your mortgage account work in almost the same way as your bank account. In addition lump sums can be credited to the account at any time without penalty so that the mortgage can be paid off early if required.

Interest Charged Daily

Most mortgage lenders in the UK calculate the interest to be charged on the mortgage account based on the balance outstanding at the end of the year. This means that if you pay off lump sums during the year you will not receive credit for this payment until the next financial year. Just as important however, is the fact that with a repayment mortgage you are making repayments of capital each month which are not taken into account until the end of that year. Over the entire term of the mortgage this can result in thousands of pounds of extra interest having been paid. Several lenders have now converted to a daily calculation of interest which means that any reduction in the mortgage debt is taken into account immediately and the interest charged is therefore reduced accordingly. This is a common feature of most of the 'Flexible' schemes.

No Early Redemption Penalties

We have looked at the effect of redemption penalties in earlier sections. These 'Flexible' schemes generally do not impose early redemption penalties.

Payment Holiday

Many of these products allow the borrower to take a payment holiday within certain limits. This could mean that you are allowed to miss up to six months payments which are then added to the mortgage debt until the pre-agreed limit is reached.

Competitive Interest Rates

Most of the 'Flexible' style products are based around a variable rate of interest (although there are some that will offer fixed or discounted rates). The lenders who are most aggressively marketing this type of product tend to offer a good, competitive variable rate and some will even guarantee to keep the rate below the normal variable rate for a period of time.

Summary

The best of these products are certainly worth considering. If you are happy to pay a competitive variable rate of interest then the other advantages listed above make them an attractive alternative to the standard products in the market. Some of these products are now being marketed as an all round financial planning tool which will enable the borrower to have all personal borrowings in one place and to also use the mortgage account as a savings vehicle. It is worth examining this philosophy in a little more detail before we move on.

If you look at your mortgage account as an available pot of money then you can see how you can borrow against that mortgage for any reason. In times when you do not need to borrow additional funds then you can use surplus savings to reduce the mortgage debt, thereby saving interest and creating a reserve fund that can be drawn down on at a later date if required.