Find out how to take a break from your repayment mortgage payments.
Christmas costs money -- a great deal of money for many of us. What with toys, turkey and trimmings, and the biggest tree in the garden centre, the expense of funding the festivities adds up pretty quickly.
If only you could call up your mortgage lender and tell them you've decided to reduce your repayments for a month or two to help cover the Christmas costs. Or maybe tell them you've decided to skip your December and January payments altogether.
They wouldn't be very impressed would they?
Well, if you have a standard mortgage, your lender wouldn't be at all happy about you missing or reducing a repayment. But if you have a flexible or offset mortgage you might be able to do so without any hassle or fuss. So you get to indulge yourself a little this festive season, in the knowledge that you can have a break from paying any or all of your mortgage payments.
Sounds good doesn't it, but how does it work?
Mortgages that fit around you
A flexible mortgage is one that gives you more control over how you repay your debt, accounting for the fact that throughout our lives we have times when money is tight, as well as unexpected windfalls or bonuses. They usually come with a range of features such as the ability to:
- Make overpayments
- Make underpayments
- Borrow back overpayments
- Take payment holidays.
It's pretty clear why it would be an advantage to underpay your mortgage when money is tight or take a payment holiday over Christmas, but why on earth would you ever want to overpay?
Being able to pay more than you owe you lender each month is actually one of the best bits about flexibility. And that's because it could save you money in the long run -- lots and lots of money!
How does it work?
If you 'overpay' your mortgage it can benefit you in two ways. Firstly, if you pay more than you owe the surplus comes straight off your capital debt. Then, because your debt is smaller, you are charged less interest (and flexible deals calculate interest daily so this happens immediately).
When you make your next monthly repayment a bigger proportion of it can go towards paying off your debt, because a smaller proportion is now needed for interest. Overpay again and your debt reduces even more, and this virtuous circle continues throughout your mortgage term.
Ultimately, you repay your debt ahead of schedule and avoid paying a massive amount of interest.
The time is ripe
If there was ever a good time to overpay it is now while rates are at their lowest-ever level.
Plus, by reducing your debt as a proportion of your property's value (known as the loan-to-value or LTV ratio) you could open up far more deals if you come to remortgage. If your LTV is currently high you may be limited in the deals you can switch to. By overpaying and reducing your debt you can help to reduce your LTV -- and get access to cheaper remortgage deals.
What about underpaying?
With some flexible mortgages you can also choose to underpay if cash is tight -- perfect for Christmas! This is usually only allowed if you have already overpaid to cover the amount you want to borrow, or you have sufficient equity in your property. It's often the same with taking a payment holiday, although all providers have different rules. Some will let you skip three months' repayments while others allow more, or less.
Borrowing back money is also possible with some flexible mortgages and can be invaluable if you have an unexpected expense. Say for example you have overpaid £100 a month for the last year totalling an overpayment of £1,200. You lender may allow you to borrow back up to that amount, because you would still be left on course to repay your mortgage on time.
One step further
An offset mortgage uses the principle of flexible mortgages but goes one step further. Rather than physically overpaying money into your mortgage, you simply link up your savings and current account to your mortgage account. The offset provider treats all the money you have in credit as one massive overpayment on your mortgage, and charges you less interest accordingly.
In exchange for this, you forgo earning interest on your savings and current account. But because your mortgage interest is usually higher than the interest you earn on your savings (which you are then taxed on), it's a better use of your money to save interest at your mortgage rate.
Even better, you don't actually have to overpay your savings. They are kept in a separate pot and you still have access to them.
You can 'effectively underpay' or borrow back too although the details differ with providers. It is usually only possible when you are ahead of course on your mortgage because you've overpaid, or you may be limited to withdraw money up to certain percentage of the property's value.
Our offset mortgage information page explains these products in more detail.
Flexible mortgages and offsets are the choice of the savvy borrower who wants their money to work harder for them and wants control over how they repay their debts. Plus in the current mortgage market reducing your debt makes more sense than ever.
So if you want to give yourself a Christmas present that will change the way you manage your money for years and potentially save you thousands of pounds, get flexible.
Use lovemoney.com's innovative new mortgage tool to find the best mortgage for you online.
At lovemoney.com, you can research all the best deals yourself using our online mortgage service, or speak directly to a whole-of-market, fee-free lovemoney.com broker. Call freephone 0800 804 8045 or email mortgages@lovemoney.com for more help.
This article aims to give information, not advice. Always do your own research and/or seek out advice from an FSA-regulated broker (such as one of our brokers here at lovemoney.com), before acting on anything contained in this article.
Finally, we tend to only give the initial rate of a deal in our articles, but any deal which lasts for a shorter period than your mortgage term may revert to the lender's standard variable rate or a tracker rate when the deal ends. Before you take out a deal, you should always try to find out from your lender what its standard variable rate is and how it will be determined in the future. Make sure you take all this information into account when comparing different deals.
Your home or property may be repossessed if you do not keep up repayments on your mortgage.
This is a classic article which has been recently updated.