Flexible Mortgages

The Mortgage of the Millennium

Borrowers circumstances can change much more rapidly and dramatically nowadays than was the case a few years ago. Few people can claim to have a job for life, and the divorce rate is higher. There is therefore a growing demand for more flexibility in mortgages and many lenders are at long last offering loans with many more options than before.The new flexible mortgages come under various brand names but are often still referred to as the Aussie mortgage. This is technically incorrect as the method was originally invented by a Canadian maths professor over 20 years ago where it accounts for nearly 90% of all mortgages. It is also widely adopted by householders in Australia and USA.

These mortgages are fast becoming the most popular in the market as they offer the borrower the opportunity of controlling his mortgage by adopting one of or all of the following options:

• Ability to pay more or less than the agreed monthly amount without penalty
• Ability to make lump sum payments
• Taking payment holidays for one or two months or if circumstances are difficult

Overpayments at anytime allow clients to reduce the term of their mortgage if they have a repayment mortgage. In the case of an endowment or similar investment vehicle where the term is fixed, it has the benefit of reducing the capital balance and thus producing a lump sum cash surplus on maturity.

Many flexible mortgages also calculate interest on a daily basis rather than monthly or annually which in itself will save significant amounts over the term as any capital paid off is credited to the account immediately and interest calculated on the reduced balance. Lenders who still use the annual rest method of calculation usually only reduce the capital balance once a year despite regular monthly payments having been made.

Flexible mortgages are available as both a straight loan or as a current account mortgage (CAM) where the borrower has the option of having a chequebook and credit card but has to bank with the lender. The latter can be of great benefit to the self-employed as a financial planning tool as their tax and VAT can be saved in their account until payment is due.

This has the dual advantage of:
Reducing the capital balance, be it temporarily, and therefore the amount of interest payable on the outstanding loan
Saving interest on a loan at a higher rate than can generally be obtained by short term investment gives a better return on your money

Also of particular interest to borrowers wishing to raise capital for various reasons, some lenders will use the equity in a property as an additional draw down facility and, subject to status, allow loans of 90% or more even though your mortgage may only represent 50% of the house value.

Finally many lenders now offer incentives such as short term discount rates linked to lower variable rates, free valuation, no higher lending fee (Mortgage Indemnity Guarantee), no redemption penalties for early repayment and free convincing costs.

This market, being relatively new to the majority of homeowners, can still present a formidable maze and many of the so-called flexible mortgages available arent as flexible they first appear. However, there are some superb deals available and an independent mortgage broker will be aware of the good and not so good.