Everyone has heard of flexible mortgages where the amount paid each month varies with the Bank of England base interest rate, but what if there was a flexible payment mortgage where you were given the choice of how much to pay based on how much you had earned each month.
For most people, budgeting for a mortgage is easy. Even with a flexible rate, the interest does not vary that much, so it is fairly straight to budget for. But if your income varies from week to week or month to month, budgeting is made very difficult indeed. For many self employed people, especially if their trade is dependent on the seasons, this is a reality. But if you can be disciplined, a flexible payment mortgage may well be for you.
An adjustable rate mortgage (ARM) means that the lender, be it your bank, building society or specialist company, sends you a statement each month offering you a list of options for that month's payment. Of course, there will always be a minimum payment, but, if work has been good, you will be able to pay more than this. One option may be just to pay interest, so the interest does not build up, even if you are not paying off any of the balance. The problem with these ARMs arises if you only pay off the minimum every month. After a set period of time, you will be sent a statement for the reminder of the term of your mortgage. If you have only paid off a small amount, this will be taken into account, and your balance recast, with a larger minimum amount to ensure you still pay off the entire mortgage in the agreed time it is 25, 30 or even more years. Thus, unless you can be disciplined enough to make the largest payment when the money is there, this type of flexible payment mortgage is probably not for you.
The initial interest rates are usually very low to grab people's attention and get them signed up to the mortgage. This can mean very low minimum payments foir those months when there is not too much cash at hand. But these rates do not last forever and are usually recalculated some point into the term of the mortgage to a far less enticing figure.
The other big downside to having a flexible payment mortgage is the likelihood of negative equity, something always worth bearing in mind. If the market takes a tumble, you want to have built up enough equity in your house not to tumble with it.
Any reputable lender should be able to give good, solid advice about flexible rate mortgages, but, more important is that the advice is impartial. If you are in doubt, go and see an independent financial advisor. It may cost you money to begin with but in the long run, it could save you thousands. And more than anything else, be honest with yourself. If you do not think you are disciplined enough to make the big, payments when times are good, then go with a traditional mortgage instead, or you could end up losing your home.