If you are concerned about paying a mortgage because you are self-employed, a flexible mortgage could be for you. Being self-employed has many rewards, such as being your own boss, but a downside is erratic pay: you can have a month or two without pay, and then the following month have lots of money.
A flexible mortgage differs from a regular mortgage as it allows you to make overpayments, underpayments and take payment holidays, subject to the mortgage agreement.
The flexible mortgage came from Australia in the early 1990’s, and in the mid 1990’s mortgage lenders realised it would be a perfect fit for many people in the UK who were self-employed, or for people who had irregular work and lifestyle patterns.
A flexible mortgage is now seen as an accepted form of borrowing and is well established in the mortgage market.
Benefits of a flexible mortgage:
- Regular overpayments can pay off your flexible mortgage early and potentially save thousands in interest repayments
- Pay in lump sums on an ad hoc basis
- Interest is calculated on a daily/monthly basis – with traditional mortgages, most banks and building societies calculate interest payments on an annual basis. At the end of each year, the mortgage balance is assessed and used to reset the interest payments. Daily or monthly interest calculations means less interest paid, and an earlier reduction of the mortgage balance
- Pay less than the normal monthly repayments
- Take a payment holiday – for example: if your flexible mortgage repayment is £600 per month, and you have previously made overpayments totalling £3000, you would be able to have a payment holiday up to five months.
- Borrow money (loan drawdown) – Borrow extra without additional approval from the flexible mortgage lender, provided the total loan does not go above an overall limit. Alternatively you could ‘borrow back’ money against previous overpayments. Many customers borrow money to fund home improvements to increase the value of their property.
- No early redemption charges.
Disadvantages of a flexible mortgage:
- You may have to make several overpayments before you can underpay or take a payment holiday
- Making too many underpayments could result in extending the mortgage repayments
- Higher interest rates than a more traditional type of mortgage
- Many lenders will not allow overpayments of more than 10% per year
To choose the right flexible mortgage for you, there are a number of considerations to take into account. Most of them will revolve around the terms and conditions that apply to the additional extras that are offered with a flexible mortgage, namely: overpayments, underpayments, and payment holiday.
Options usually come in a variety of different forms, for example: a payment holiday that has to be earnt, whereas with some flexible mortgage packages it comes as a standard option. It is best to discuss with your lender of the flexible mortgage what exactly the terms and conditions are, as this can throw up many important facts about how flexible the mortgage is.
The primary providers of flexible mortgages are banks, building societies, and specialist mortgage companies. Most mortgage lenders in the UK offer some form of flexible mortgage, such as a fixed, tracker or a discount rate flexible mortgage.
Because the mortgage market has become increasingly competitive, more people are using mortgage brokers, and they are now the largest distributors of mortgage products for lenders. The majority of mortgage brokers are regulated to ensure protection for the borrower.
Although a flexible mortgage is ‘a new kid on the block,’ it has become an established and respected type of mortgage.