Flexible mortgages

Flexible mortgages give you extra control over how you repay your mortgage and allow you to pay your mortgage off early. They can save you money as well as giving you the option to pay more or less depending on your circumstances at time.

There are a range of features that make a mortgage ‘flexible’ and different mortgage deals will include different features, so it’s helpful to understand how they all work when you’re deciding whether a flexible mortgage is right for you and which product to choose. Some features may be more important to you than others. 

What is a flexible mortgage?

Flexible mortgages are normal mortgages with special features attached. They can have fixed, discounted and tracker introductory rates like any other type of deal. Here are the features that make a mortgage flexible.

The ability to make overpayments

You can pay more than your normal monthly repayment to reduce your balance more quickly and pay interest on less, which will save you money. This can either be done every month or as a lump sum when you have extra cash. If your lender calculates your interest daily (it can also be done monthly or annually) you’ll save on interest as soon as you make the overpayment.

Most mortgages let you overpay by a certain amount during your deal period – often up to 10% of your outstanding balance a year – when early repayment charges (ERCs) would otherwise apply. More flexible options may let you overpay a higher amount.

If you’ve moved onto your lender’s standard variable rate after your initial deal has ended rather than switching to a new deal there will be no restrictions on how much you can overpay as ERCs don’t apply.  

You can make significant savings by overpaying. For example, if you have a mortgage of £100,000 over 25 years paying an interest rate of 2% (assuming the same rate over the whole term), by overpaying £100 a month (making a payment of £524 instead of the normal £424) you could pay your mortgage off 5 years and 10 months early and save £6,695 in interest.

The advantage of doing this instead of setting a shorter mortgage term at the outset is that if you can no longer afford the extra £100 you can stop paying it, and if you can afford to overpay more than that (subject to the overpayment limits on your deal) you can, and pay your mortgage off even earlier.

Alternatively, if you were to make a one-off overpayment of £5,000 after you’ve had your mortgage for a year – you may have got a bonus at work or an inheritance, for example – you could pay your mortgage off 1 year and 6 months early and save £2,961 in interest.

It’s not always a good idea to overpay your mortgage though. If you have debts that are more expensive than your mortgage – personal loans or credit card debts, for example – you would be better off clearing those first. 

And if you’re debt-free (apart from your mortgage) you should make sure you have built up enough cash savings to live on for 3 to 6 months in an emergency, such as you lose your job. 

However, if you have a mortgage with underpayment, payment holiday and borrow back options (see below), you’ll be able to effectively get back any money you’ve overpaid if you need it.

Whether it’s worth overpaying also depends on how much interest you would get (taking any tax you would pay on it into account) if you put your money into the highest-paying savings account instead versus the amount of interest you would save on your mortgage. In general, if you can get a higher rate in a savings account than you are paying on your mortgage, it’s not worth overpaying, but it’s worth doing your sums carefully.

The ability to make underpayments

If you’ve previously made overpayments you’ll have the option to underpay for a certain amount of time. This could be useful if your income reduces or you need the money for something else.

The option to take payment holidays

If you want or need to take a break from paying your mortgage – because you’ve lost your job, for example – you can apply to your lender to take a payment holiday, usually for up to 6 months. Whether your lender allows this may depend on how long you have had the mortgage for and whether you have previously overpaid.

The interest continues to build up while you’re not making payments so you may end up paying more interest by the time you’ve paid off your mortgage.

The option to borrow back

If you’ve previously overpaid, you may be able to borrow back this money if you need it for a big expense such as a special holiday or home improvement project. This allows you to use your mortgage like a savings account while saving on interest as a result of overpaying your mortgage.

The option to switch to a fixed rate

Some lenders let you take out a tracker mortgage initially but then change to a fixed rate when you want more certainty about how much your repayments will be. You may want to do this if the Bank of England base rate, which most tracker rates follow, starts to rise or you think it will. 

Flexible offset mortgages

Offset mortgages are also a type of flexible mortgage. These let you offset your savings and sometimes the money in any of your current accounts against your mortgage so you pay interest on less. 

For example, if you have a mortgage of £100,000 and savings of £30,000 you’ll only pay interest on £70,000. You won’t actually earn interest on your savings (so won’t pay any tax on this interest either) but will still be able to access them if you need to, which wouldn’t be the case if you had used these savings as part of your mortgage deposit to borrow less at the outset.

You can either keep your repayments the same, which means you’ll effectively be overpaying and can pay your mortgage off early, reducing the interest you pay overall. Alternatively, you can use the interest saving to reduce your repayments each month.

Offset mortgages tend to charge slightly higher rates of interest than conventional mortgages but if you have a relatively large amount of savings it’s likely you’ll still save on interest. However, it’s important to work out whether you really will benefit from an offset mortgage before taking one out. A mortgage broker can help you do this.

Read more in our offset mortgages guide.

Finding the best flexible mortgage

If you’re using mortgage comparison sites to find the best flexible mortgages it may be hard to see which ones are truly flexible. Every site will display results differently although most will tell you whether overpayments are allowed on the deals they show. If you are using comparison sites make sure you look at a few as they won’t all give you the same results. 

When you’re comparing deals, always make sure you look at the total cost over the initial period (after which you should switch to a new deal), including the monthly repayments and fees, as the ones with the lowest interest rates aren’t necessarily the cheapest overall once you factor in arrangement and other fees. 

Although the total cost may end up being different if you overpay on your mortgage over the deal period, this is still the best way to compare like with like.

An independent mortgage broker/adviser will be able to look at the whole of the market accessible to them (not all deals are available through brokers although some brokers will still check direct-only options) to find you the best deal. There are many deals that are only available through brokers so you might miss out on some of the best if you don’t speak to one.

A broker will also be able to find and compare truly flexible mortgage options and work out if they’re right for you, depending on how much you might end up overpaying and the interest rate compared to other deals.

Many brokers get paid through commission from the lender so you don’t always have to pay a fee, although check their credentials and whether they cover the whole market before you choose one. In some cases it might be better to pay a fee if the best deal for you doesn’t pay commission.

Another advantage of using a broker is that you can complain to the Financial Ombudsman Service if you get poor mortgage advice and get compensation for any financial losses, even if the broker goes bust as you will be covered by the Financial Services Compensation Scheme.

Find one through personal recommendations or websites such as Unbiased.co.uk and Vouchedfor.co.uk.

Even if you go direct to a lender for a mortgage, they must usually offer you advice, although they can only advise on their own products. In some cases a lender might let you take out a mortgage without advice, known as ‘execution-only’, but they will have to make it clear to you what protections you’re giving up. 

Is a flexible mortgage right for you?

Whether you should take out a flexible mortgage depends on your circumstances.

A flexible mortgage might suit you if:

  • You’re self-employed so will earn more in some months and less in others. This means you can change your repayments based on your income at the time. You’ll still have to be able to prove to the lender that you’ll be able to make at least the minimum repayment each month when you apply for the mortgage

  • Your income fluctuates from month to month because you earn commission or bonuses

  • You get a bonus every year that you would want to be able to pay into your mortgage as an overpayment

  • You’re on a temporary contract so might experience a drop in income when it ends (although it may be harder to get a mortgage if you’re on a temporary contract)

  • You’re on a zero-hours contract so don’t know how much you’ll earn each month (again it may be harder to get a mortgage under these circumstances)

  • You’re expecting a windfall that you would like to use to overpay your mortgage

It’s probably not worth taking out a flexible mortgage if:

  • You’re unlikely to use any of the features, although there are many deals with flexible features that don’t cost more than conventional mortgages, especially if you just want to be able to overpay by up to 10% a year, so you won’t lose out. Offset mortgages do tend to cost more though, so you should only take one out if it will actually save money

  • You’re not very disciplined with your money. If it’s likely that you’ll end up taking back all the money you’ve overpaid by underpaying, taking a payment holiday or borrowing back, a flexible mortgage isn’t worth having

9th October 2020