Take A Break With A Mortgage Holiday
Flexibility in your mortgage means you can have the summer off your repayments.
This article has already been emailed to Fools as part of our Summer Lolly campaign.
Sometimes we all need a nice break, and I'm not just talking about a jaunt to foreign climes.
How about a holiday from your mortgage for a couple of months? That would be nice, wouldn't it?
Or perhaps you could just tell your lender you are only going to pay half in July and August, because you've spent all your money this summer on fake tan and a skimpy wardrobe. See how they like that.
Well, if you have a flexible mortgage your lender won't mind a jot, because you are positively encouraged to use your mortgage account to suit your needs.
Yes, with some mortgages you don't have to pay the same amount month in, month out, regardless of whether money is tight or you are feeling flush. A flexible mortgage lets you pay more in the good months and less in the bad ones - as long as it evens out in the end, of course!
Getting flexible
A flexible mortgage works like a normal mortgage and can be taken out on a repayment or interest-only basis and as a fixed, discounted or tracker rate.
But it allows you to have more control over how you repay your mortgage debt. If you have more money one month you can `overpay' your mortgage and reduce your outstanding debt. This immediately reduces the interest you are charged as flexible mortgages calculate interest daily. By paying less interest you can shave years off your mortgage term. You owe less so you can repay it more quickly.
But what about the holidays?
If you have a tight month you can choose to `underpay', or take a `payment holiday' where you skip a couple of payments. But your lender will usually insist that you have already overpaid to balance out your account, otherwise you would effectively be in arrears.
For example, if you had overpaid £100 a month for a year you would have built up £1,200 in overpayments. If you do nothing this will reduce your debt, and your mortgage term. But if you decide to take a payment holiday you could skip payments up to £1,200 and still be on course to repay your debt at the end of the term.
Flexibility is actually available on many lenders' standard deals nowadays. You just need to know what to look for. HSBC's tracker rate allows unlimited overpayments, some underpayments and has no early repayment charges. Plus it calculates interest daily.
Some lenders offer specific flexible deals, such as Yorkshire Bank's Flexible Payment Mortgage. It allows you to pay weekly, fortnightly or monthly, make regular increased repayments or pay one-off lump sums to your mortgage. You can reduce your mortgage repayments or take payment holidays if you have made sufficient overpayments. You can even take money back out of your mortgage if you have already overpaid in.
What about offset mortgages?
An offset mortgage is the ultimate flexible mortgage. You roll up all of the money you have in the black (savings and current account) and overpay it into your mortgage.
Rather than earning a measly rate of interest on your savings (that you are also taxed on) you save interest at a higher rate on your mortgage. This makes much more financial sense because savings rates are lower than mortgage rates.
And offsets make life even easier for borrowers because they don't actually require you to pay all of your savings into your mortgage - you can keep your accounts in separate pots, but benefit as though they are all in one.
As long as your mortgage balance reduces to an agreed level each month you can manage your money to suit you. Woolwich is currently offering an offset product at a hugely competitive 5.74%, although borrowers need a 40% deposit to get the deal. Intelligent Finance has a five-year fixed rate offset at 6.89% up to 85% loan-to-value.
If you only require limited flexible facilities, such as the ability to overpay, check the terms of your existing deal - they probably come as standard.
But if you really want to get flexible you might need to look harder for a mortgage that gives you total control about how and when you repay your debt - including allowing that summer payment holiday.
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