Pay now, save later

The chance to repay your 25-year mortgage within 10 or 15 years, saving thousands in interest payments, is the best reason for the growing popularity of flexi-loans.

A truly flexible mortgage allows you to make overpayments and underpayments without penalty and, if you have built up enough credit in your account, the chance to take payment holidays.

If you have made overpayments, you can often borrow the money back again with no penalties, charges, setup fees or valuations. Another important feature is that interest is calculated daily or monthly, not annually in arrears.

This means overpayments have an immediate impact on the interest you pay. If you regularly make overpayments, this can significantly reduce the term of the loan.

The idea originated in Australia. Yorkshire Bank, a subsidiary of National Australia Bank, claims to have been the first lender to bring the product in Britain.

Helen Crawford of Yorkshire Bank says: "In 1994 we introduced a flexible mortgage as our mainstream product for the UK market. The typical borrowers for our flexible mortgages are people who are remortgaging. They tend to be 30- to 40-year-olds with two kids. They switch to a flexible mortgage because they want to retire earlier or enjoy more money sooner and that's a way of doing so.

"Additionally, they have to send their kids to university which they are going to have to pay for, and the flexible mortgage also enables them to build up enough equity."

By the end of the year there will be few of the top 10 lenders without plans to introduce flexi-loans to attract borrowers looking for better value and benefits in their new home loan.

The First Active Flexible Mortgage Index, an independent market report on flexible lending, identified that 63% of flexible mortgage borrowers surveyed rate the ability to make overpayments as the products' most important feature. At least 58% said they aimed to repay their mortgages early.

The Royal Bank of Scotland says 55% of its new home loan business is in flexible mortgages. For a £60,000 capital and interest mortgage, the monthly payment would be £423.68. A monthly overpayment of £20 would result in a saving of £8,959 and the mortgage would be paid off two years and nine months early.

To repay even earlier than this the borrower would have to increase substantially the overpayments. This may not suit everyone but for those with an erratic income, such as seasonal or contract workers, or those who receive a proportion of their income in bonuses, they are a boon.

But unless you make use of these features you will probably get a cheaper rate from a more conventional product. And there is no reason why you should not mix the best of both worlds and buy a fixed-rate flexible loan.

Stroud & Swindon Building Society has just introduced its Fixed & Flexible Mortgage. Patrick Bunton, senior manager at London & Country Mortgages, reckons this is the first flexible contract on a fixed rate to have been priced at a very keen rate.