Firming up the flexible loan

Flexible mortgages are now plentiful and popular but until recently there have been few fixed-rate deals available. 'Flexible' has become a fairly ubiquitous term, describing everything from the ability to make occasional lump-sum repayments of your mortgage to a current account mortgage, where your home loan is, in effect, an overdraft secured on your property.

Research carried out on behalf of lender First Active Financial shows that flexible loans account for 11 per cent of total gross mortgage lending - or 4 per cent of total loans in place. Such loans, unheard of a few years ago, are estimated to account for 50 per cent of gross lending by the end of 2004. Until recently they have been offered mainly with variable rates of interest.

Around a dozen lenders now offer such loans with fixed rates. There are risks with flexible loans of course: borrowers need to ensure that they do not over-borrow against the value of their homes, a temptation that may grow with rising property values.

As interest rates rise, flexi-loans with fixed rates may appeal to some borrowers, especially those who feel they are likely to increase their borrowing over the short term rather than to pay off lump sums.

Once you have taken everything into account, including various perks such as no Mortgage Indemnity Guarantee (MIG) charges and free legal fees, there is not a great deal to choose between the various options.

The Skipton Building Society offers four options, all with fixed rates for two years until 30 April 2002 - the exact rate depends on the ratio of loan to property value and whether insurance is taken up, but the rates range from 6.15 per cent to 6.65 per cent. After this period the rate will be 1.35 per cent above the Bank of England base rate for three years. This compares with Skipton's standard variable rate of 7.49 per cent.

Skipton's fixed rates for flexi loans are among the cheapest in this market but there are overhanging redemption periods with penalties. If the mortgage is repaid in full, on or before 30 April 2002, there is a redemption charge of 3 per cent of the balance of the mortgage account, then 2 per cent until 30 April 2004 and then 1 per cent until 30 April 2005.

That said, it is possible to make capital repayments of up to 10 per cent of the original balance of the mortgage each year without charge. It also has other flexible benefits, such as payment holidays and interest calculated on a daily basis.

Mark Smitheringdale, head of corporate communications at the Skipton Building Society, says: 'Borrowers are now demanding both a competitive deal and flexibility from their lender.

'The society's view of interest rates is that they will continue to increase over the next 12-18 months or so and then steadily decline. Therefore, it is sensible planning to fix your mortgage at a competitive rate and then enjoy the additional benefit of falling rates.'

The latest lender to offer a fixed-rate flexible mortgage is Standard Life - pioneer of the variable-rate flexi loan - with what it calls its 'Freestyle Fixed' mortgage. This offers a three-year fix to 3 April 2003 or a five-year fix to 3 April 2005 both at 7.25 per cent. The maximum loan to value amount is 90 per cent.

There is no tie-in after the fixed-rate period, although any capital repayments made within the fixed-rate period will incur redemption charges. For example, under the three-year fix a borrower making a capital repayment in year one will be charged five months gross interest at the fixed rate on the amount redeemed, if they make a repayment in year two it will be four months gross interest on the amount redeemed and in year three it will be three months gross interest.

Interest is calculated daily and payment holidays of up to two months every year are allowed after six consecutive monthly payments.

Other lenders in the flexible mortgage market offering fixed rates include Egg, with a rate of 7.69 per cent for five years, Exclusive Connections, with rates of 6.99 per cent and 7.99 per cent, Mortgage Express, with rates ranging from 7.25 per cent to 7.75 per cent, Scottish Widows, at 7.3 per cent, and Woolwich, at 6.64 per cent or 6.69 per cent.