One of the products I get asked most about, which are usually very little use for the majority of people, are flexible mortgages. On the face of it, they sound great, they allow you to make unlimited overpayments without any penalties. All other things being equal, if somebody gave you the choice between a flexible mortgage and a non-flexible mortgage you would go for it.
But how useful are they really to the average borrower? Firstly, with most normal mortgages these days you can make some over-repayments without penalty anyway. The most common allowance is an overpayment of 10% of the outstanding balance per year whilst you are tied in. So if you owe £100,000, you can pay £10,000 a year more than you have to, without paying a penalty. That is more than enough for most people. Then once your tied in period has ended, the mortgage becomes a flexible mortgage anyway, and you can pay what you like off it.
Secondly, although flexibility is a good feature, it usually comes at a cost. Either a higher interest rate or higher fees to enter the mortgage will apply. You probably therefore need to utilise the feature considerably above that 10% limit that other mortgages allow, in order to recoup your losses that you incur for having opted for a flexible mortgage.
Thirdly, quite often, but not always, flexible mortgages are available only on variable rates of interest. If a fixed rate is really what you are after, then you may need to decide what is more important to you, securing the interest rate or having the flexibility to make unlimited overpayments. Unless there is a very good reason, certainty of payment is often more desirable.
Although they are being mis-used by many borrowers, they do have their place in the market. An example of when they should be used is if say somebody has another property which they are selling, but they don’t know when. A flexible mortgage could allow them to pay off a considerable lump sum at any time. Another example could be somebody who is potentially looking to move in the near future, and so doesn’t want to tie themselves into a deal, making the potential future move more difficult and costly.
Jason Hinde FPFS, Cert SMP – Chartered Financial Planner
9th May 2016
“