Why Flexible Mortgage Deals Appeal To Homebuyers

Recent research suggests that there are now about 50 providers of flexible mortgage deals. These may include offset mortgages, current account mortgages or standard mortgages with flexible features. Since the first flexible mortgage deals appeared in the UK in the late 1990s, demand for flexibility from mortgage lenders has grown. In the last five years, the sector has grown by more than 77 per cent a year and there was £84.5 billion of new flexible mortgage deals last year. By 2010, flexible mortgage deals are predicted to be 50 per cent of all mortgage deals**.

So why the big interest in flexible mortgage deals? The name gives a clue. It's the flexibility that has UK consumers flocking to lenders. Borrowers can underpay, overpay, take payment holidays, pay in lump sums and repay the whole loan early, usually without penalty. People who don't earn a steady income - such as those whose main income comes from annual dividends, bonuses or commissions and self-employed people - will find this flexibility appealing. Flexible mortgage deals may also appeal to those who are starting a family and those who wish to consolidate their debts, though people should be wary of turning short term debts into long term ones. Underpayments and payment holidays could increase the mortgage term and/or the total amount payable.

The other big appeal is putting your savings to work for you. People who have £10,000 to £20,000 in savings lying around for a rainy day are usually not earning very much interest. Recent research showed that although some savings accounts pay 5 per cent, the average interest on savings is around 2.85 per cent, with many still getting 0.1 per cent. As a recent critic put it, that's no better than putting your cash in a drawer or under a mattress***. Instead of earning an abysmal savings rate, people on flexible mortgage deals can forego the interest and use their savings to reduce the interest paid on their offset mortgage. Flexible mortgage deals of this type mean that savers effectively get the mortgage interest rate on their savings - and they avoid paying tax on the interest they would have earned on their savings.

How Flexible Mortgage Deals Work

So, how do flexible mortgage deals work? Apart from standard mortgages with flexible features, there are two main types of flexible mortgage deals. The only real difference between them is the way your money is managed. With current account mortgages, all your borrowings are in one account. This means loans, mortgage, savings, credit card debt and current account are all wrapped up. Flexible mortgage deals of this type can leave you with the feeling of being always in the red. Offset mortgages are the other flexible mortgage deals. With these, your money stays in separate but linked accounts and you still get the benefits of offsetting. With all flexible mortgage deals, your credit balances reduce the amount of your debt and the amount of interest you pay.

As well as all the money paid out, a flexible mortgage comparison must consider how lenders handle the issue of borrow back - that's when you've overpaid and you want to get back some of your money. Again, this is easier with some lenders than with others. Depending on the type of flexible mortgage account, getting your money back may be as simple as withdrawing it from the ATM. However, in other cases it can require an application to the offset mortgage lender.

For many, the thought of repaying their mortgage early is like a get out of jail free card, and this is another reason for the appeal of flexible mortgage deals. Mortgage repayments are set at intervals, usually annually, which means that people who regularly have credit balances will use less of that monthly payment on interest. Since people overpay every month, even without using any of the flexible features, this means that most people repay their offset mortgages early. This, more than anything, is the appeal of flexible mortgage deals*.

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© 2007 and 2008 Offset Mortgage Centre | Terms and Conditions | Privacy Statement | We don't charge a fee for admistration of an offset mortgage. The Offset Mortgage Centre is the trading name of The Mortgage Broker Ltd, (a whole of market mortgage broker), which is an appointed representative of Home of Choice Limited, which is authorised and regulated by the Financial Services Authority | Your home may be repossessed if you do not keep up repayments on your mortgage. *Source Barclays Bank: Calculation based on an offset tracker product; repayment mortgage of £100,000 over a 25-year term that has been offset with £20,000 savings, resulting in a reduction in mortgage term of 8 years and 8 months or a saving of £44,867 in overall interest. Calculation assumes balance remains constant throughout the life of the mortgage and that the mortgage loan and savings balance will vary. Outcomes will be either a reduction in payments or a reduction in mortgage term. No interest is paid on balances offset against the mortgage. Typical rate is 6.45% (variable). The overall cost for comparison is 6.7% APR. **Source: Datamonitor - Uk Flexible Mortgages 2006 Report. ***Source: NS&I Press release - Short-term Savings need a good home too - July 2005.