A recent survey by the Council of Mortgage Lenders showed that 16% of borrowers now have a flexible mortgage, which demonstrates the increased popularity of this type of product.
Most flexible mortgages will charge interest on a daily basis, which means that any payments will be reflected immediately, reducing interest on the outstanding balance.
Flexible mortgages also offer the ability to overpay, under- pay, take payment holidays, or make lump sum withdrawals. However, some lenders will only allow borrowers to take advantage of these features if they have been making regular payments for a certain period of time, usually six months. Borrowers making overpayments can benefit from savings on the interest that would normally be paid over the term of the mortgage by clearing their debt early.
With current account and offset mortgages, the credit balance in the current or savings account is used to reduce the interest payments on the mortgage. So rather than gaining interest on a lower savings rate, interest is saved at the mortgage rate.
Interest charged on these types of mortgage can sometimes be higher than the interest charged on a conventional variable rate mortgage. Similarly, it is rare for fixed or capped rates to be offered in conjunction with a flexible mortgage, although some lenders may offer short-term discounts. Many tend not to have any redemption charges.
The key point to remember is that flexible mortgages are not suitable for everyone and are aimed at the financially disciplined. Caution should be exercised towards those borrowers who are purely interested in the underpayment or payment holiday facilities.
Real benefit from these products is gained by those borrowers who take advantage of all the options, otherwise they could end up paying more than they would with a conventional fixed or discount mortgage.