What Is a Flexible Mortgage and How Does It Work?

With the vast number of mortgage plans available on the market, it can be tricky to pick the right one.

One of the most popular options is a flexible mortgage. 

But, what is a flexible mortgage and what exactly does it offer?

Keep on reading to find out.

What is a flexible mortgage in the UK?

A flexible mortgage is a customised version of a standard mortgage that gives borrowers better control over their payments. They usually come with different features, which makes them “flexible,” and vary depending on the type of loan.

In most cases, borrowers can choose how to repay their mortgage, how much they pay monthly, pay off the flexible mortgage with no early repayment charges, and even take back their cash.

What Are the Most Common Features Offered by Flexible Mortgage Lenders

Since flexible loans are customisable, lenders have the freedom to include or remove some special features that often accompany these types of mortgages. 

Some of the most common features include:

Overpayments

Most lenders give borrowers the option to pay more than the initial monthly payment by increasing the regular payment or through a lump sum. Upping the monthly payment is optional and borrowers can always reduce it to the initial amount. 

Underpayments

In certain circumstances, lenders sometimes allow borrowers to pay less than the monthly payment they initially agreed upon. They are more likely to let you underpay if you’ve overpaid and are ahead of the original payment plan. 

Interest calculated daily

Calculating interest on a daily basis is not only practical for the lender but can save the borrower some cash, especially when the standard variable rate was at 3.62% in 2020. The payments that borrowers make are taken into account immediately, rather than on a monthly or yearly basis, which can affect the overall interest rate. 

Payment holidays

A mortgage payment holiday allows borrowers to skip mortgage payments for a certain period (no longer than 6 months) due to unforeseen events. The downside is the interest rate may rise in the meantime.

Flexible mortgage savings account

In case you overpay at any time during your mortgage term, some lenders might let you withdraw that money at a later point. This might help borrowers save on interest and use the mortgage like a savings account.

Switching

In most situations, borrowers can switch between different types of flexible mortgage plans without having to pay any extra fees or apply to remortgage. 

Different types of flexible mortgage 

Flexible repayment mortgages

Flexible repayment mortgages are a traditional model, where the borrower’s capital and interest rate gradually reduce during the mortgage term. 

This type of payment usually allows borrowers to overpay, underpay, or take payment holidays.

Flexible offset mortgage 

Flexible offset mortgages give borrowers the opportunity to save money on interest by linking their savings account to their mortgage. In this case, funds the borrowers have in their savings account offset the interest they pay.

Flexible fixed-rate mortgage 

With this type of mortgage, the interest of the property loan stays the same for a specific period of time. They usually last for up to 5 years, but there are some mortgage providers that can offer a fixed rate of up to 10 years. 

Flexible tracker mortgage 

A flexible tracker mortgage is a type of mortgage where the interest rate varies based on the rates of the bank of England. The flexible tracker mortgage is the same as the standard tracker mortgage, except (since it’s a flexible mortgage) borrowers can switch to a different type of mortgage plan at any time.  

A tracker mortgage is a good idea if the interest rates are low but stable or high but falling. 

Advantages and Disadvantages of Flexible Mortgage

Flexible loans come with a variety of features and high-interest rates. 

Pros: 

• Flexible payments: Borrowers can pay more or less than the initial monthly payment without being subject to penalties and extra fees. 
• Save on interest: Most lenders calculate interest on a daily basis, which may result in borrowers paying less than they normally would. 
• No extra fees: Borrowers can switch to another type of mortgage plan without having to pay fees or apply for remortgage and can pause monthly payments for a certain period of time.

Cons:

• High interest: Most flexible mortgage rates are higher compared to other mortgage deals.
• Tricky comparison: Since this type of loan can come with different special features, it is difficult to compare plans and calculate what the most affordable option is. 

How to Pick the Best Flexible Mortgage for You 

With mortgage plans, there are good, bad, and unfortunate deals.

If you’re unsure what type of flexible mortgage plan best suits your situation, it might be a good idea to seek advice from a broker. You can also talk to different lenders and compare features and requirements or use an online tool to compare interest rates. 

In doing your research, here’s what you should consider: 

• The current  property value on the market and the future trends 
• Mortgage amount 
• Term length 

Bottom Line

Flexible mortgages are often the go-to loan options for borrowers that want greater control over their payments. From over- and underpayments to payment holidays, these types of mortgages offer many different features to meet your financial needs and circumstances.