Money: A more accommodating mortgage

Discount mortgages, cashbacks and cheap fixed-rate mortgage deals have dominated the mortgage scene for the last two years, but lenders are increasingly worried about the expense and borrowers are worried about the cost of being locked into a deal for years after the incentive has ceased. Now the marketing men are promoting flexible mortgages, which allow borrowers to speed up or slow down payments, and even take payment holidays or extra credit.

Another advantage is the ability to accelerate repayments. You don't have to be a mathematical genius to calculate that even if the mortgage rate is only 6 per cent by the time you have paid off a mortgage over 25 years you have paid back double the amount you borrowed, and more if you have an endowment mortgage which only pays the capital off at the very end of the mortgage life.

In the 1970s and 1980s, when mortgage rates were in double figures, the cumulative repayments could have been three times the original debt, although high inflation meant the value of the money repaid was significantly less than the money borrowed.

In the Nineties, however, interest rates have been consistently higher than inflation, the burden of a mortgage is real and any chance of paying it off early is well worth considering.

For some time now, it has been possible to negotiate shorter repayment terms - for example, over 10, 15 or 20 years.

However, while such schemes can greatly reduce the total capital repaid, they do not fully accommodate those borrowers whose incomes fluctuate - the self employed, for example - or others who may be unable to meet the repayment one month, but be in a position to pay it twice over the next. A more flexible approach was needed and a growing number of lenders are now offering flexible or "life-style" mortgages.

Bank of Scotland, for example, has launched the "Personal Choice" mortgage. With a variable interest rate, currently at 6.99 per cent, it offers a number of options that allow borrowers to, with certain limits, over- or under-pay the monthly payments. Six-month payment "holidays" are also available. It is also possible to borrow more against the mortgage and write cheques for up to a total of 5 per cent above the original loan value.

The cheque-book facility allows savers to reduce their borrowing while retaining access to liquid funds, allowing any earlier overpayments to be re-borrowed as required. Borrowers could always invest spare cash instead but Bank of Scotland claims the investment would have to offer a return in excess of 9.2 per cent for a 24 per cent basic-rate tax payer, and 11.65 per cent for a 40 per cent tax payer, to make it a better deal.

With many people's incomes increasingly performance-related, and with lump sums being paid in the form of bonuses, commissions and dividends, the attraction of flexible mortgages is clear - payments can be increased when cash flow is looking healthy, but when outgoings are likely to increase - for example, when school fees need to be paid or maternity leave needs to be taken - borrowers can reduce their mortgage payments or even take a complete repayment break.

Mortgage Trust, Clydesdale Bank, Homeloans Direct, Legal & General, Market Harborough Building Society, Yorkshire Bank and, from next week, Tipton & Coseley Building Society all offer flexible mortgage plans, although terms vary and not all offer withdrawal facilities.

Patrick Bunton of independent mortgage brokers London & Country (0800 373300) is recommending Stroud & Swindon Building Society's Flexible Mortgage. The scheme has no redemption penalties and the society will pay all valuation and legal fees, so that a borrower can remortgage and move from a current lender without cost.

Apart from offering greater repayment flexibility, such schemes, Mr Bunton believes, can be used to make borrower's money work harder. He cites the example of an elderly person who may be keeping a pounds 30,000 mortgage because of the Miras tax advantages (and paying the variable interest rate of around 6.99 per cent), but who might also have pounds 30,000 as liquid investment in the building society - which earns interest of only about 4 per cent.

"In this instance, it would make sense to switch the mortgage to a scheme like Stroud & Swindon's and then pay off most of the mortgage immediately - leaving perhaps only pounds 500 owed," he explained. "The borrower would be safe in the knowledge that they could withdraw the money as and when it was needed, but they would be a net 2.99 per cent better off."

The downside of a flexible mortgage is that standard variable interest rates are charged, and there are no discount, cashback or fixed-rate options currently on offer. Mr Bunton advises against a flexible mortgage for borrowers who don't want the uncertainty of a variable rate - first time buyers perhaps - or those who could not afford the repayments if the rate suddenly increased. "With an election looming, those borrowers whose mortgage repayments represent a substantial proportion of their income could end up catching a heavy cold," he said.

Ian Darby of mortgage brokers John Charcol (0800 718191) has wider reservations. "I welcome the concept of flexible mortgages, but believe they will only appeal to that small minority of borrowers whose income stream is very uncertain," he said. "For most people, I think the standard variable rate is too high a price to pay and until flexible schemes begin offering fixed- rate, cashback or discount incentives they will prove to be more expensive in the long run. Most lenders are working to a mortgage rate of nearer 6 per cent - not 6.99 per cent - and on a pounds 100,000 mortgage, paying the standard variable rate might cost an additional pounds 6,000."

He also worries that the temptation to dip into any excess money which has accumulated may prove too strong for some borrowers. "The facility to treat the paid equity on the house as liquid funds may be too hard to resist" he said. "It would be like having a credit card with a very large spending limit."