Lifting the lid on flexi-loans

Halifax's flexible mortgage account from its internet arm, Intelligent Finance (IF), is being launched this month. Heather Scott, of IF, says: "The plan is to open with a telephone-only service to see what the initial response will be."

IF is one of the new generation of flexible mortgages, the fastest-growing sector of the home loan market. But are they right for you?

Current account flexi-mortgage

There are three types of flexible mortgage. The current account flexi-mortgages, such as Virgin One and First Active, pioneers of the concept, and, more recently, Yorkshire Bank, work on the basis that your salary is paid into a single current account, which is also the mortgage account. Salary balances are used to reduce the amount outstanding on the mortgage - even if you eventually spend all your salary during the course of the month and borrow it back. This has the effect of reducing the term of the mortgage and cuts the interest charges, which are calculated on a daily basis.

The 'jam-jar' flexi-mortgages

This kind of flexi-mortgage keeps your mortgage, current account, savings account and credit card accounts in separate pots. But all credit balances on savings and current accounts are moved across to reduce the cost of borrowing on your mortgage account. Both IF's new offering and Woolwich's Open Plan work in this way. IF maintains that some customers prefer this concept because they still have "savings" on which they can draw and they don't appear to be permanently in debt, as they do with the all-in-one current account mortgage. It will be interesting to see if IF is right about this.

With both current account mortgages and the "jam-jar" concept, you can borrow at the standard variable mortgage rate, up to a pre-agreed amount - usually three-anda-half times your earnings or up to 95 per cent of the property's value, whichever is the lower. You can also take payment holidays.

'Flexible' loans

Finally, there are upwards of 40 "flexible" home loans that do not have current account facilities and offer varying degrees of flexibility. Some are little more than a standard variable rate mortgage, with the facility to apply for a pre-agreed further advance.

Others, such as the Alliance and Leicester, Bank of Scotland, Chelsea, Mortgage Express and several smaller building societies, still calculate interest on a monthly basis. Halifax (not IF) and Norwich and Peterborough are using annual interest calculations. This reduces much of the benefit of this kind of flexible loan.

Flexible mortgages are aimed at the self-employed and others, such as salespeople earning commission, whose earnings and bonuses can be erratic and arrive in lump sums. The greatest advantage for these borrowers is that these large lump sums will immediately reduce the balance outstanding on the mortgage. And it gives the homebuyer the ability to borrow cash back if they have a blank period with lower earnings, or no earnings at all.

Flexi-mortgages are useful if you have to fund, or top up, school fees out of your income or loans. A loan secured against your home is always the cheapest finance you can get.

A flexi-mortgage would be useful if you were starting a business. The high-street banks charge at least three per cent more than the bank base rate, often more for new business loans - and they want to take a second charge over your home, too.

Anyone using a flexi-mortgage to finance a business should be aware that if the business fails, they could lose their home, too.