Repay us when it suits you

Mortgages are becoming more flexible, writes Nic Cicutti

Mortgages are easy to understand, right? You take out a loan and then pay back a certain amount every month for the next 20 or 25 years. This simple type of mortgage has been the mainstay of the home loan market for more than a century.

Yet for many borrowers, the requirement to pay a fixed amount each month, seemingly in perpetuity, has always been one of the most unattractive features of buying a house.

Until recently, the response of lenders was similar to Henry Ford. When asked whether his first car, the Model T, was available in a choice of colours, he was said to have replied: "You can have any colour you like, as long as it's black."

Today, however, more and more lenders have entered the market with a range of flexible mortgages, offering greater repayment choices to consumers. Not before time.

As Vicky Burn, deputy editor of MoneyFacts, says: "For the majority of us, the largest purchase we ever make is buying a home. It is therefore important to choose a mortgage to suit each person's financial situation.

"Flexible mortgages are intended to give loans that suit borrowers' circumstances both now and in years to come."

The principle behind flexible mortgages is simple. In various ways, they allow borrowers choices as to how they repay their loan. This can be useful in cases where people may face sudden extra costs, such as having a child.

For example, Bank of Scotland offers loans which allow borrowers the option of overpaying each month to reduce the scale of their loan. Minimum pounds 500 lump-sum repayment options are available. This can be handy if, as with many, you come in for a small windfall.

BoS also allows underpayment worth up to the equivalent of six months' instalments, plus a choice of instalment options. Finally, the bank offers the possibility of lump-sum withdrawals of the mortgage already paid. BoS currently operates a variable rate of 7.24 per cent.

Legal & General Mortgage Services, the insurance company's home loans arm, also offers over and under-payment options, plus lump-sum withdrawals, up to the available reserve in the mortgage account. L&G's current variable rate stands at 6.49 per cent, with loans on offer based on up to 95 per cent of a home's value.

Scottish Widows, another insurer, recently launched its own flexible mortgage, which offers overpayment options - but with a minimum lump sum of pounds 2,000. No underpayments are allowed, but withdrawals of at least pounds 1,000, based on a single monthly cheque, can be taken from the loan account. Scottish Widows' mortgage is offered at a variable rate of 6.73 per cent, on up to 80 per cent of a home's value.

Stroud & Swindon, a relative minnow among building societies, has entered the flexible market with a 7.25 variable interest rate on up to 85 per cent of the home's value. The society allows any overpayment, no underpayments, but a withdrawal facility from the mortgage account.

In addition, borrowers are given further incentives, including up to 3 per cent of the mortgage advance, plus free valuation and legal costs. Incentives of this type are available from many other flexible mortgage lenders.

Another option available is that of payment holidays. These are on offer from Bank of Scotland, First national Building Society, Legal & General, Market Harborough and Tipton & Coseley building societies.

Two lenders, Woolwich and Abbey National, offer a variant on this theme. Instead of allowing over and underpayments, or cash withdrawals, they simply offer payment holidays.

Flexible mortgage providers

Monthly underpayment

Bank of Scotland Yes

Clydesdale Bank No

First National BS Within reserve

Furness BS No

Legal & General Within reserve

Market Harborough Fixed for 2 yrs

Scottish Widows No

Stroud & Swindon No

Sun Banking Corp No

Tipton & Coseley No

UCB Homeloans No

Source: MoneyFacts