A flexible mortgage is exactly what it says on the tin. It is flexible in that it enables you to overpay and underpay within certain limits.
Some flexible mortgages also let you take payment holidays or borrow more within the mortgage.
This type of mortgage can be useful for those who don’t know what the future holds or who have a variable income but you need to know what you’re buying.
What is a flexible mortgage?
A flexible mortgage has a little more freedom than a standard mortgage that makes it useful for people whose lives aren’t as predictable as others.
Rather than a straight home loan with a set payment each month, you’ll have an agreed amount you’ll pay with the freedom to pay more, or less, as your situation dictates.
You’ll also be able to take short payment holidays or borrow against what you have already paid back.
It should go without saying that these facilities will need to be agreed with your lender first.
How does a flexible mortgage work?
A flexible mortgage works in mostly the same ways as standard mortgages, but with a little more freedom.
You still borrow a set amount for a set period of time with a set monthly payment. But you have the flexibility to change them as long as you discuss it with your lender first.
Most lenders will have a customer dashboard on their website where you can change your payments or take advantage of the flexibility.
That flexibility is typically:
Mortgage overpayment – Pay more than the monthly amount to pay down the loan amount faster. Some flexible mortgages will cap this at 10% of the mortgage amount per year, others won’t.
Mortgage underpayment – Pay less than the agreed monthly amount over a period of time with the difference added to the overall mortgage.
Payment holiday – Similar to what we saw during the pandemic where you can take a number of months off paying the mortgage. The number of months is added to the end so the loan will last the same number of months longer.
Borrow back – If you have overpaid or have paid off an amount of mortgage, some flexible mortgages allow you to re-borrow that money back without having to set up a new loan.
The pros and cons of flexible mortgages
Like most things finance, there are pros and cons of flexible mortgages.
Pros of flexible mortgages:
Ideal for people with variable incomes – A flexible mortgage could work well for the self-employed, seasonally employed or those whose income fluctuates.
Allows overpayments – Pay off your mortgage faster when you have the spare cash. Just make sure to ensure the overpayment reduces the capital and not interest!
Underpayments and payment holidays – Reduce payments or take a break if you need to with no impact on the loan or your credit score.
Daily interest calculation – Interest is calculated daily which can work for or against you depending on the economy. It does mean overpayments have an instant impact on the interest though.
Cons of flexible mortgages:
Higher interest rates than standard mortgages – Flexible mortgages aren’t the cheapest option and you’ll usually pay more for one than other types of loan.
Higher fees than standard mortgages – Many flexible mortgages come with higher setup fees, valuation fees and some even have final fees.
Not all lenders offer them – Not all lenders offer flexible mortgages so your choice may be limited.
More complex to manage – If you use the flexibility within the mortgage, it can be difficult to see exactly when it will be paid off and how much money you owe.
Flexible mortgages – Yes, or no?
Flexible mortgages can offer value to anyone whose income can fluctuate or who wants a little more flexibility with their finances.
The ability to change payments, take a payment holiday and re-borrow can be useful in some situations. But you pay for it.
Rates are usually higher, arrangement fees are typically higher and you may have a harder time calculating exactly where you are.
This is definitely a mortgage type where expert help is useful. I recommend consulting a mortgage broker or IFA and working with them to assess whether a flexible mortgage is the right product for you or not.
