Flexible loans follow flexible lifestyles

Clare Arthur looks at mortgages that fit changing work patterns

Forget your spouse and children, the longest financial commitment most people make is to their lender. While lots of marriages end after a few years and children fly the nest, the traditional mortgage lasts 25 years.

All three commitments are likely to cost you far more than you expected. Furthermore, many people find that their jobs are no longer as predictable. Work patterns are changing, thousands have been made redundant, many more find themselves signing up for short-term contracts or setting up their own businesses. A steady flow of income is no longer guaranteed.

To help people cope, several mortgage lenders have launched a new type of home loan, the flexible mortgage. Unlike the traditional mortgage, which requires a certain level of payment every month, payments can be adapted to meet changing circumstances. If you are flush with cash, you can overpay your loan. If money is tight, you can arrange to reduce or stop payments for a while. Alternatively you can choose to make 10 mortgage payments a year, leaving two months free to spend any extra cash as you wish.

Ronnie Macaulay, a senior manager for Bank of Scotland Mortgages Direct, says its experience of offering flexible loans has been that low interest rates have encouraged borrowers to overpay. Regular overpayment can make a big difference both to the length of the mortgage and the amount of interest you have to pay. A pounds 50,000 repayment mortgage would cost pounds 331.01 a month to repay over 25 years, assuming that interest rates remain at 6.99 per cent. But by overpaying your repayment loan by pounds 100 a month, you reduce the term to 15 years and one month, and save pounds 23,178.

Bank of Scotland Mortgages Direct will even allow you to draw out cash from your Personal Choice mortgage account by writing cheques.

Borrowing this way to buy a car or pay school fees is a lot cheaper than taking out a conventional unsecured bank loan. A pounds 5,000 unsecured loan from the Bank of Scotland would cost pounds 172.40 a month over three years. But it would cost pounds 156.69 in overpayments every month to return the pounds 5,000 in equity to a flexible mortgage over the same period.

However Ian Darby, of John Charcol, an independent mortgage broker, sounds a note of caution about flexible mortgages. The interest rates on most are at the lender's standard variable rate and borrowers normally do not benefit from discounts, fixed rates or cashbacks.

He says: "We are fully aware of the advantages of repaying a mortgage early, and we think the time of flexible mortgages will come, but not until they are priced as competitively as other mortgages. Very few customers are interested in them because they do not offer cashbacks and discounts."

Market Harborough Building Society is the first lender to offer its flexible loan, Mortgage-by-Design, with a cashback offer equivalent to 3 per cent of the loan's value. The loan has an arrangement fee of pounds 295 and early redemption penalties.

Before you borrow

The number of options offered by flexible loans make them difficult to compare:

q Ask an independent mortgage broker for advice. They should know all the schemes available on the market and be able to work out which is the best for you.

q Check whether your existing loan will enable you to overpay. Many lenders allow borrowers to make lump sum repayments of capital, and an increasing number can handle monthly overpayments, although there can be catches.

q Watch out for charges. Some flexible mortgages levy hefty arrangement and early redemption fees.

q Do ask for help when trying to work out the consequences of under-paying or stopping monthly mortgage payments altogether.