If you are self-employed and worry about being able to pay your mortgage, a flexible mortgage could help. Being self-employed has many benefits, like being your own boss, but the pay can be unpredictable. You might not get paid for a month or two, and then the next month you might make a lot of money.
A flexible mortgage is different from a regular mortgage because the mortgage agreement lets you make overpayments, underpayments, and payment breaks.
The flexible mortgage was first used in Australia in the early 1990s. By the mid-1990s, mortgage lenders in the UK realised that it would work well for many people who were self-employed or whose work and life schedules changed often.
A flexible mortgage is now accepted as a way to borrow money and has been around for a long time in the mortgage market.
A flexible mortgage has the following pros:
- Making regular extra payments on a flexible mortgage can pay it off early and save you thousands of dollars in interest payments.
- Pay in lump sums when you need to.
Interest is calculated daily or monthly. With traditional mortgages, most banks and building societies figure out how much interest to pay once a year. At the end of each year, the mortgage balance is calculated and used to reset the interest payments. When interest is calculated daily or monthly, less interest is paid and the mortgage balance goes down faster.
- Pay less each month than you would normally.
Take a payment holiday. For example, if your flexible mortgage payment is GBP600 per month and you have made overpayments totaling GBP3000, you could take a payment holiday for up to five months.
Borrow money (called "drawing down" on a loan). Borrow more money without getting extra permission from the flexible mortgage lender, as long as the total loan doesn't go over a certain limit. You could also "borrow back" money from overpayments you made in the past. Many people borrow money to pay for home improvements that will make their homes worth more.
- There are no fees for early return.
The bad things about a flexible mortgage are:
- You may have to make a few overpayments before you can underpay or take a payment holiday.
- If you make too many underpayments, it could make your mortgage payments last longer.
- This type of mortgage has higher interest rates than a more traditional one.
- Many lenders won't let you pay more than 10% more than what you owe each year.
There are a number of things to think about when choosing the right flexible mortgage for you. Most of them will be about the terms and conditions of the extras that come with a flexible mortgage, like overpayments, underpayments, and payment holidays.
Options usually come in different shapes and sizes. For example, a payment holiday is an option that you have to earn, but some flexible mortgage packages include it as a standard option. The best thing to do with a flexible mortgage is to talk to your lender about the terms and conditions. This can tell you a lot about how flexible the mortgage is.
Banks, building societies, and companies that only do mortgages are the main places to get flexible mortgages. Most mortgage lenders in the UK offer some kind of flexible mortgage, such as a fixed, tracker, or discount rate flexible mortgage.
Since the mortgage market has become more competitive, more people are using mortgage brokers, who now sell the most mortgage products for lenders. Most mortgage brokers are regulated to make sure that the borrower is safe.
Even though it's a "new kid on the block," a flexible mortgage is now a well-known and respected type of mortgage.
