How to cut short your home loan - and save thousands

Using a lump sum to pay off all or some of your mortgage can save you and your family thousands of pounds and cut short the length of your mortgage term by months or even years.

And the best mortgage with which to make such payments is the increasingly popular flexible variety.

Truly flexible mortgages should allow over and under payments, let you borrow back on payments already made, and offer payment holidays. They should also calculate interest daily.

The Malhi family from Slough intend to save themselves more than £80,000 and pay off their loan nearly six years early by making substantial overpayments in a few years' time. When housewife Indy, 29, goes back to work as a marketing assistant, they will use £1,000 of her salary to make a lump sum payment each month. The Malhis - Indy, husband Kam and children Ryan, nearly three, and Gavina, one - took out a 25-year base-rate tracker mortgage for £95,000 with Alliance and Leicester last October. They repay £558 a month.

"When the children are older I will go back to work and we will put nearly all of my salary into the mortgage," Ms Malhi says. "We aim to spend the savings on a better quality of life for us and the kids. We will put the money into the children's education and have things like holidays which are a luxury at the moment."

Flexible mortgages used to be the preserve of the wealthy; the payoff for flexibility was above average interest rates.

But big lenders NatWest and Abbey National have just rushed out affordable products to join those on offer from the likes of the Woolwich and First Active Financial. The Abbey National deal offers a 1.1% discount for six months, taking the interest rate down to 5.65%. After that the rate is guaranteed to be no more than 1% above the base rate.

Flexible mortgages are the best vehicles for making the most of lump sum payments because timing is crucial. Many mortgage lenders only credit payments to accounts once a year, so if you pay in several thousand to your mortgage in February it may not impact on the outstanding debt until the next January. Flexible mortgages offer a way round this problem because most calculate interest daily. There are no penalties and often no limits attached to making overpayments.

Siobhan Hotten of independent financial adviser John Charcol says: "They are a useful tool for reducing debt. Companies are competing on features and there is something for everyone in flexible mortgages."

But some are more flexible than others. Check exactly how often over and under payments are allowed, and whether a minimum payment is required. The Bank of Scotland personal choice mortgage requires a minimum overpayment of £500. And the Woolwich open plan mortgage charges interest monthly rather than daily.

Another type of flexible mortgage is a current account loan, which is a financial package complete with current account features. Virgin One and First Active Financial offer them.

With this type of loan you can use your salary to help reduce the amount of interest you pay over the life of the loan. Since interest is calculated daily, there is an immediate benefit from the reduction in your mortgage balance when your wages are paid in. And that is without any extra payments.

Take a woman with a 25-year mortgage who earns £20,000 a year. If she put down a 20% deposit and borrowed £70,000, she would pay 7.05% interest. The effect of her salary temporarily reducing her mortgage balance each month would save £4,715 in interest and clear the loan nine months early. Less dramatic than the Malhi example, but no overpayments have been made.

Interest is effectively being earned at the mortgage rate. Put another way, you are investing your money in a supersafe, high-interest rate environment. Paying off a mortgage early can be a better way of using extra cash than leaving it in low-return instant access accounts.

A basic-rate taxpayer would need a savings account paying over 10% to find as good a home for spare cash as paying off the mortgage - higher-rate taxpayers would need nearly 13% - rates that simply do not exist.

But Ms Hotten cautions that current account mortgages complete with ATM cards and drawdown facilities are only for the financially disciplined, not for those who ever have an overdraft as interest will mount up against them.