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The flexibility factor

The flexible mortgage market has come of age. Gross flexible lending has surged to 21 per cent of mortgage lending in the first quarter of the year.

There is an ever-increasing demand for flexible mortgages and this has been highlighted in a recent report by data analysts Prophit showing this market is no longer the niche it was just a few years ago.

This trend stems from Australia, where flexible mortgages are now more the norm than the exception and a similar theme has recently started to take shape in the UK.

Prophit&#39s report, based on economic research and forecasting, has measured the total outstanding balance of mortgages managed under a flexible agreement at £38.6bn as at March 31, 2000 compared with £24.8bn at the end of last December.

This increase in loans over the first quarter accounts for an average of £4.6bn a month meeting flexible borrowing criteria, suggesting an increasing surge in the offering of flexible mortgages both from existing mortgage customers buying into flexible products and mortgage lenders offering their existing borrowers additional flexible features.

Despite the tremendous growth in the industry, it is important to acknowledgethe two distinct means by which a customer can obtain a flexible mortgage.

On a proactive level, where customershave actively bought a flexible mortgage, the value of outstanding balances at the end of March was £30bn.

In addition, £8.6bn of outstanding balances can be attributed to customers who have been offered elements of flexibility as part of a standard mortgage product.

By stripping out the proportion of flexible lending which has not actively been requested by the borrower, it is evident that around £5.4bn has been lent to flexible mortgage customers in the first quarter alone this year.

This is equivalent to a gross flexible lending figure of 21 per cent of the market at the end of March. To put this in perspective, this equates to a total of 144,000 additional homes being managed under a flexible agreement in the first three months of the year. Flexible mortgages are continuing to grow at an astounding rate.

Younger borrowers, particularly those under 35, are more likely to have a flexible mortgage than a standard loan. However, with the increasing availability and uptake of flexible mortgages, a broader spread of borrowers in all age groups are starting to embrace the idea.

In awareness terms, consumers are becoming much more knowledgeable about the features inherent in these products. One of the more obvious – the ability to overpay – has been identified by 88 per cent of all mortgage borrowers. Other components, such as the ability to take payment holidays, underpay and the ability to combine the mortgage with a current account, are also becoming noticed as important individual elements of flexibility.

It is worth considering that a number of consumers who believe they hold a flexible mortgage actually hold a mortgage that offers some but not necessarily all the features of a truly flexible product. Indeed, when prompted, 12 per cent of 2,000 borrowers surveyed were not at all sure whether they had a flex-ible mortgage.

This may be caused in part by growing numbers of bigger lenders heavily promoting flexible mortgages while the vast majority of their existing customers still have their mortgages on standard terms.

A number of lenders have recently started offering additional flexible features to new customers as well as offering some flexible features to existing customers but only upon request. Therein lies the confusion as to what is classified as a truly flexible product. There is a vital need to establish a benchmark outlining the features in a truly flexible mortgage.

Brokers play an essential role in a guidance capacity to diminish the likelihood that consumers are misguided into buying a product which they believe is flexible but which offers only limited features.

Most lenders are nowadays claiming to offer a flexible product which offers custom- ers the ability to overpay. However, many only offer a limited range of features or indeed limit the extent to which the consumer can utilise these.

As customers become more knowledgeable about what is on offer in the marketplace, lenders can no longer get away with pullingthe wool over their eyes. These days, thecustomer is king – they know what he wantand expect to receive only that productthat truly suits their needs.

Perhaps not surprisingly, borrowers are much more interested in reducing their debt and saving money than borrowing cash back again and as more lenders begin to offer fully flexible, current account features as part of their standard product offering (such as the option to pay the salary into the mortgage), borrowers are increasingly likely to understand the time savings to be made by operating their mortgage in this way.

It is clear that consumers are increasingly expecting to manage their finances around their lifestyle rather than being burdened by a rigid and costly 25-year mortgage.

Projections show that flexible mortgages are expected to account for 67 per cent of the market by 2004 and this is likely to be further fuelled by the internet, where the more innovative lenders now offer an easy means of accessing product details and client information.

It is now in the industry&#39s interest to ensure that those mortgages termed “flexible” are just that.

The six features that make up a truly flexible mortgage

Overpayments at any time for any amount.

Drawing back any overpayments on demand.

Interest calculated daily to ensure maximum benefit from overpayments

Payment holidays.

Underpayments.

No redemption penalties

In addition, for total mortgage flexibility, the mortgage should give customers the option to pay their salary directly into the mortgage account and draw it back again if required using a debit card or chequebook.

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