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All for one – and one for all?

Mortgages are big business. They are complex and can run for decades. They are the most expensive purchase most people make and the biggest monthly expense anyone will have. Yet it is easy to overlook them in financial planning discussions.

We take for granted that the amount we pay for our mortgage is fixed. We accept the fact that we are tied to a fixed period for a fixed amount.

If we need more money, such as when we buy a car, we borrow from a different lender instead of using the equity in our own house as security.

If we need to pay less – or not at all – for a few months, we have to go, cap in hand, and have to endure punitive fees and approbation.

It does not have to be this way. And advisers need not accept that their clients have to put up with it being this way. They have the means to incorporate mortgages within their overall financial planning advice, often enabling them to use innovative and cost-effective solutions for everyday problems.

How often can recommending an investment when a customer still has large debts be best advice? Surely it is illogical to concentrate on trying to build an investment fund when the customer&#39s wallet is still being drained by interest payments which will almost always be higher than any interest or growth their investment will achieve?

Similarly, is it always best advice to sell a 25-year product based on its cost over the first two or three years? Yet that is what many advisers do when recommending mortgage deals based on the initial discounted rate – a discount that will evaporate after barely more than one-tenth of the product&#39s lifespan.

The common perception is that if a customer moves their mortgage to the latest “best buy” as soon as their “tied-in” period is over, they will save themselves a small fortune.

Yet it is a fact that many people will stick with their mortgage lender for years, allowing themselves to be penalised for their loyalty by being charged high interest rates to pay for the subsidies necessary to attract new customers at reduced rates.

In terms of the cash spent, a house is not usually the most expensive purchase a person will ever make. Usually it is the mortgages used to finance the purchase. So perhaps the obvious starting point is to find a way of reducing the cost of borrowing before investing starts and to look for ways of reducing the amount the customer has to pay over the life of the debt rather than just the first couple of years.

A mortgage is far more than a monthly utility bill. It will run, whether it is with one lender or several, for a good proportion of a typical work-ing life. During that time, the income may fluctuate or stop altogether for a short time while the amount the customer needs to borrow may rise and fall.

Yet many mortgages have no ability to change with the customer&#39s changing lifestyle and needs. They offer a fixed term, with fixed repayments, for a fixed amount.

But which is the best way to balance debts against investments while allowing the flexibility demanded by a modern lifestyle?

Well, for a start you must find a mortgage that allows customers to overpay whenever they can and by as little or as much as they can rather than be tied to a specific amount or frequency.

The next step is to make sure all the customer&#39s money is working hard. It is pointless having salary sitting in a cheque account paying little or no interest, even if it is only there for two or three weeks. With an all-in-one account the salary works to reduce the mortgage interest.

Similarly, savings need to work hard for the customer. Again, an all-in-one account allows the customer instant access to the money, yet the money will effectively “earn” a mortgage-style interest. Again, as it is reduced borrowing, not earned interest, it is tax-free.

In today&#39s world it is quite common to find that although the mortgage may be a customer&#39s biggest debt, it is by no means their only one. But how often does financial planning for the future include minimising outgoings on existing debt?

Taking the opportunity to consolidate borrowing, moving it from an unsecured to a secured basis is an effective way of bringing down monthly payments. By the same token, the customer should consider keeping monthly payments at the same level, effectively overpaying the mortgage, reducing the time it takes to repay the mortgage and bringing the cost down, too.

Some lenders have embraced this idea of flexibility and produced products accordingly. Others have opted for a halfway house while some have labelled their products as flexible, but scratch the surface and there is a traditional mortgage with all the red tape that implies.

The ability to underpay or take a payment holiday as needs dictate is also an essential feature of a flexible mortgage. Those that only allow underpayments to the value of overpayments or that have a laborious approval process hardly fit the bill.

As the all-in-one tag suggests, with this account the client holds all their money in just one account just like a cheque account with a large overdraft limit.

This type of account provides full banking facilities including current account, savings, mortgage and loans combined. As a result, income and savings automatically reduce the total borrowings, which in turn lowers the amount of interest the client is paying.

The traditional view is that all-in-one accounts only suit people who have irregular incomes such as the self-employed or those who get a good proportion of their pay in the form of bonuses. And while it is true that these people do benefit, others can, too.

For example, managing money the traditional way will mean that you earn pitiful rates of interest on income, shabby rates of interest on savings – in some cases below inflation. On the borrowing side, you will pay for your mortgage and pay two to three times the mortgage rate on any unsecured borrowing such as personal loans or credit card spending.

If you throw everything into an all-in-one account, you will effectively earn mortgage-style rates both on your income and savings and on all borrowing.

Recent research has shown that eight out of 10 homeowners with combined borrowings of £50,000 or more would be better off with an all-in-one account, saving interest, on average, of £16,713 and paying off their mortgage two years earlier.

Everyone has different aims, objectives and circumstances and life has a habit of throwing up the unexpected. Many people with traditional mortgages will find their lack of flexibility either a hurdle or, at the very least, an unnecessary hassle.

Recent research from the Future Foundation has suggested that all-in-one flexible mortgages could account for around 25 per cent of net new mortgage lending by 2003.

The research also suggested that the annual growth in these mortgages over the next 10 years is expected to average as much as 40 per cent – with sales likely to double each year in the early years and growth easing thereafter. Is the plain vanilla mortgage heading the way of the dodo?

More and more players are entering the market. Recently both Royal Bank of Scotland and First Direct launched their versions. With such mainstream household names linking to current account mortgages, it is certain that they will become much more than a niche.

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