29-Jun-2009
Purchasing a new home usually proves to be financially taxing, and even in the economic downturn the costs that a prospective homeowner needs to meet these days are rising. This is why mortgage lenders and other financial establishments have developed different payment schemes and mortgage rates. Your job as a borrower is to look for the option that will suit your individual needs and financial capabilities. A flexible rate mortgage is one such option that you may want to consider.
What does a flexible rate mortgage entail? A flexible rate mortgage offers just what the name suggests: flexible payments. When purchasing a new home, a flexible mortgage rate will allow you to make a payment according to your financial status. If you have some extra cash handy, then you can make an 'overpayment' which is in excess of the monthly payment that was previously agreed upon. This way, the outstanding balance will be reduced. The second scenario will be an 'underpayment' if you are a little short on cash. You can make a payment which is less than the regular monthly payment that is agreed to pay, and the remaining balance may just be added on to your next month's mortgage. There are even payment holiday options where you are allowed to not make any payment for a specific period and the outstanding balance will also be added to your next month's fees.
What are the advantages of a flexible rate mortgage? A flexible rate mortgage will give you more control over your finances. For example, if you choose to make overpayments when you have an easier cash flow for your monthly budget, then you can reduce the total mortgage amount and save a significant amount on interest. This way, you can take advantage of payment holidays during the months that you are short on cash, or even borrow back these overpayments.
Another advantage of a flexible rate mortgage is having the ability to underpay. With a fixed mortgage loan, you need to come up with a fixed amount of money each month, at a certain deadline, otherwise you would have to pay off late charges and incur more interest. With a flexible rate mortgage, the monthly payment can be reduced and you can just make up for it on your next payment schedule. All in all, a flexible rate mortgage will particularly benefit those who do not have a fixed monthly income, because that they can adjust their monthly payments accordingly.
How can a borrower benefit if the interest can be calculated daily? With a flexible rate mortgage, there is no fixed amount that you have to pay monthly, so the remaining balance of the mortgage will depend on whether you made an overpayment or an underpayment. Because of the variability of the payment amounts, you would need to calculate the remaining interest or mortgage amount on a daily basis, especially if you made an overpayment. This way, you can keep track of the outstanding balance at all times.
Is there any downside to a flexible rate mortgage? Just like any other mortgage option, there are disadvantages when choosing a flexible rate mortgage. If you are only paying the minimum amount each month, you are not doing yourself any favours because you are really just paying off interest and never decreasing the mortgage balance itself. Also, flexible home loans differ from fixed rate mortgages in that you enjoy the benefits of flexibility in your finances - and this may come at a higher overall cost. In the end, however, paying this premium may well be worth it if it means having the freedom to gain control of your finances.
First Time Buyers, Your Time Has Come!
How much is your Mortgage really costing you?
Mortgage Payment Calculator