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The flexibility factor

The 21st Century has arrived and the flexible mortgage boom has followed. Flexible mortgages have taken the UK market by storm, currently accounting for a total outstanding balance of £31.9bn and 12.4 per cent of gross lending.

These at least are the findings of the latest quarterly First Active Flexible Mortgage Index, which is based on an independent survey of over 2,000 adults and a market report by data analysis specialists Prophit.

The majority of lenders – 42 to be precise – now offer a flexible mortgage of their own, with the intention of moving away from the traditional 25-year fixed-payment loan to one which more accurately meets consumers&#39 changing needs.

With this proliferation, however, has ensued a degree of apathy, with many borrowers paying only lip service to the concept of true flexibility. This has resulted in a disparity between those who actually have a truly flexible mortgage (4.4 per cent of the mortgage population) and those who assume they ha
ve one but actually only have a loan offering limited features (27 per cent).

Without question, advertising is vital in relaying the existence of flexible mortgages but it is intermediaries who play a key role in translating the benefits – and the limits – among the array of products now available.

Ultimately, it is the current account mortgage which provides most freedom, allowing consolidation of loans and savings and providing the means for consumers to make vast interest savings.

Despite some lenders&#39 claims that borrowers only look for a finite number of flexible features in a mortgage, 27 per cent of borrowers with a flexible mortgage said they would consider remortgaging to a current account mortgage.

This indicates an understanding among flexible mortgage holders of the true ben- efit of paying a salary into the mortgage while having the option of drawing down these extra funds when required.

The index has shown a shift in the age of flexible mortgage holders, with more people aged 35-54 taking flexible mortgages than ever before. In addition, contrary to popular belief, flexible mortgage holders are not confined to the South – where larger wage slips and bonuses are typical. Boundaries are becoming less defined, with 30 per cent alike living in the North of England and London and the South-east.

When asked about the features most important to them in a flexible mortgage, 46 per cent of borrowers found the ability to overpay as key. Seventy per cent of borrow-ers who overpaid made regular monthly overpayments, whereas the remainder made one-off lump sum payments, such as bonuses, to their account. It is clear that the main reason for making overpayments is to pay the loan off early, with 65 per cent of borrowers planning to do so.

Despite the age-old notion of the “mortgage for life”, only 2 per cent of borrowers actually want to pay their mortgage off in 25 years – a startling revelation for the more traditional lenders.

Unfortunately, some lenders offering “flexible” mortgages are still calculating interest monthly – and even annually – meaning the consumer does not earn interest on his or her overpayments until the end of the period. Daily interest is the most crucial element of a truly flexible mortgage, according to a fifth of all borrowers.

The advantage of overpaying on a flexible or current account mortgage is that the funds are available again should they be required.

While 16 per cent of borrowers said the ability to underpay or take payment holidays was most important to them, only 2 per cent had actually done so to date.

For many, however, there was a security factor of having the facility available rather than a current need to use it.

Because flexible mortgages are still relatively new, and since many borrowers are currently overpaying, these facilities are likely to increase in demand as individual circumstances change in months and years to come.

With current account mortgages increasing in popularity, it is not surprising that 10 per cent of consumers see the ability to combine a mortgage and current account as the most important element of a flexible mortgage.

Intermediaries are now supplied with calculators so they can demonstrate the advantages of paying a salary into the mortgage, even when drawing most – or all – the funds back at a later stage.

Perhaps due to the popularity of flexible and current account mortgages, the last five years alone have seen over 40 per cent of borrowers taking out a new mortgage.

With more competition now entering the market – such as the likes of Intelligent Finance and the Woolwich – flexible mortgages offering only limited features and incurring penalties are in grave danger of being left in the mud after the storm. Fully flexible mortgages are predicted to account for 55.5 per cent of all mortgages offered in the UK by 2005.

Ignore it, but it won&#39t go away. Consumers are beginning to understand what it means to have a mortgage to suit, and they approve.

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