What are the benefits of flexible mortgages?

As mortgage rates rise and lenders try and compete on price, more and more are trumpeting the flexible features of their home loans. But what exactly are flexible mortgages and why are they important?

Fundamentally, flexible mortgages are home loans that allow some deviation from their repayment plans.

This can mean borrowers can overpay - reducing the mortgage balance and term - when times are good and potentially underpay, re-borrow amounts that have been overpaid or take payment holidays when money is tight.

But there are many different forms of flexible mortgage.

"Many of today's mortgage lenders will promote the fact their mortgage is ‘flexible’ as a key selling point," said Julia Harris, senior mortgage analyst at comparison site Moneyfacts.co.uk.

"But with over 8,500 mortgage products available, through over 125 lenders, it is inevitable that lenders will use different features to define their mortgage as flexible."

Broadly speaking there are three main types of flexible mortgage: ones that allow a set level of overpayment, ones that are fully flexible, and current account or offset mortgages.

The first sort is the most common, with figures from Moneyfacts showing just five lenders do not allow overpayments on any of their current mortgage range.

This type of flexible mortgage generally limits the amount that can be overpaid, either to a maximum monthly figure or to around ten per cent of the remaining debt. People trying to pay more than this off early can incur an early redemption charge.

Fully flexible mortgages - as defined by Moneyfacts - allow underpayments, overpayments, repayment holidays and charges interest on a daily or monthly basis.

"But even within this definition there can be variations dependent on the lender and product chosen," explained Ms Harris.

"Some lenders will only permit underpayments and repayment holidays up to the value of any overpayments previously made, while others may be less restrictive."

Almost half (49 per cent) of lenders offer at least one fully flexible product.

Offset and current account mortgages take any money in a customer's current or savings account away from the value of the home loan.

This means people effectively pay interest on a smaller loan, saving on repayments. More than 30 lenders now offer some sort of offset product.

"If used appropriately [offset and current account mortgages] can be the ultimate in flexible mortgages, allowing your term to be reduced and providing tax saving opportunities, particularly for the higher taxpayer," Ms Harris said.

But what all these flexible mortgage products share is the ability to overpay - and this their key benefit.

"Anyone with a flexible mortgage who has any spare savings that could be invested into their mortgage would be well advised to consider this," Ms Harris said.

Moneyfacts calculates paying £16 per month extra can knock a year from your mortgage term. If you can afford an extra £97.97 a month, this can cut five years from the mortgage term and save some £22,000 in interest payments.

"As mortgage balances and terms become larger burdens, if you can afford to make even the smallest of overpayments, it will help reduce your mortgage terms and could save you thousands in interest," Ms Harris concluded.

"But if you are looking for a flexible mortgage, make sure you know the exact terms, as lenders' conditions vary dramatically."