Can a flexible mortgage really rid you of your debt? Alison Brace explains the good, the bad, and the costly
One in three of us takes out a mortgage with a standard variable rate. This basically means that mortgage lenders rub their hands with glee at our ineptitude to suss out better deals on the market and use our money to fund those better deals. Most importantly, we lose out. But let's face it, it's not exactly ineptitude: it's lack of time to do the homework and also a feeling of total confusion when faced with the myriad choices of the mortgage marketplace.
Okay, so a large number of us might be hopeless at reducing what is our largest debt, but we all agree on one thing: we want to get rid of it. Quickly.
That's why most of us take more than a passing interest in flexible mortgages, offset mortgages, current account mortgages, and their earliest incarnation, the One account.
All the publicity suggests that this kind of mortgage will effortlessly rid you of your debt, lopping years off the length of your loan and cutting the overall interest paid out.
So just how do they work? And are they for you? The One account, set up by Virgin Direct in 1997 and now run by the Royal Bank of Scotland, was the first current account mortgage to grace the financial market.
The idea is that your mortgage, current account and any savings are combined to give you one balance. All your money is in one pot; your savings and your salary bring down the balance on your mortgage and therefore reduce your interest payments each month.
The balance creeps back up again as your monthly outgoings come out. According to Martin Lewis of moneysavingexpert.com, a current account mortgage works well for those who are organised with money, always spend less than they earn each month or have substantial savings.
But beware: by having all your money in one pot, you have to get used to being in the red by tens of thousands of pounds each time you look at your balance at a cashpoint.
According to the Royal Bank of Scotland, this galvanises One account holders to reduce their debt by making their money or their indebtedness very real. "Between 85 and 90 per cent of One account holders are ahead of schedule on their repayments because all their debt is in one place and they can physically reduce that debt on a daily basis," says an RBS spokesman.
Offset mortgages work on similar lines. Here, instead of one pot, you have three: one for your mortgage, one for your savings and one for your current account.
As with the One account, your savings are used to reduce the balance of your mortgage. Say, you have a mortgage of pound;80,000 and savings of Pounds 10,000, you only pay interest on the difference of pound;70,000. Your savings work as an overpayment.
These accounts make a great deal of sense for higher rate taxpayers, because you avoid paying interest on your savings. Interest on a savings account is lower than the interest on your mortgage, explains Martin. "Far better to pay less interest on your loan than earn interest on your savings," he adds in his Guide to Remortgaging, which is sponsored by London and Country, the no-fee mortgage brokers.
The interest rate on current account mortgages and offset mortgages is higher than on straightforward mortgages. Martin suggests you should have savings of pound;25,000 to get the best out of an offset mortgage. These accounts also particularly suit the self-employed and those who enjoy bonuses or come into a lump sum of money.
London and Country warns that not all flexible mortgages offer the same amount of flexibility. The minimum requirements you should look out for are the possibility of taking a payment holiday, overpaying or underpaying each month, being able to borrow back your overpayments and benefiting from daily interest calculation. Check, too, that there are no extended early repayment charges.
But if it's simply the facility to make overpayments on your mortgage to bring the balance down that you are looking for, then it's best to shop around for a traditional mortgage loan, which has a low interest rate and some flexible elements.
Mike Hislop of the Teachers Building Society, says that flexible mortgages have benefits for teachers planning on taking time out from the classroom. "You can take a payment holiday for six months, but you have to pay that amount back when you get back or spread it across the remaining term of your mortgage," says Mike. "However, it is better if you overpay over a 12-month period and build up a balance on your account."
To see if a flexible mortgage would work for you, do the sums on the moneysavingexpert's mortgage calculator, or on the One account's mortgage shrinker at www.oneaccount.com
London and Country: www.lcplc.co.uk. Guide to Remortgaging: www. moneysavingexpert.com. Teachers Building Society: www.teachersbs.co.uk