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Overpay into your flexible account and spend the ‘available funds’ on anything you want – the problem is, all that saved money can be wiped out

Abbey was this week accused of “unfairly” slashing the value of homes, and using this as an excuse to “grab” thousands of pounds that its mortgage customers had stashed away for the future.

In the last few weeks, many Abbey flexible­ mortgage holders have received a bombshell letter telling them that ­because of falling house prices, the bank has reduced the estimated value of their property.

That has a dramatic impact on the way people use the mortgage. In some cases it means thousands of pounds paid into their account – which they were perhaps hoping to dip into at a later date – has suddenly been whipped away. That means they are unable to access this money, which they might have been planning to use for a holiday or new car. It is thought as many as 8,000 people have received letters telling them that some, or all, of this cash has been removed. Justin Cuckow is one; he claims the Spanish-owned bank has behaved “outrageously”.

By making a number of overpayments, he had built up £10,300 of what Abbey calls “available funds”, that he could use in future to take a payment holiday or pay less each month, or to spend on whatever he wanted.

He thought he was behaving prudently­ by shovelling in the extra cash. So he was shocked to receive a letter a few days ago telling him that, as part of a review of all Abbey’s flexible mortgage accounts, the bank had reduced the estimated value of his flat from £143,000 to £130,000. That automatically reduced his credit limit by a similar amount, “which reduces your available funds to £0.00″. The letter then rubbed salt in the wound: “Please note that if house prices increase in the future, we will not automatically increase your credit limit.”

In other words, the £10,300 that Cuckow had carefully built up has been removed at a stroke.

Abbey has around 200,000 flexible mortgage customers. These deals give you the freedom to overpay when you want to, then underpay or take a break from your monthly payments if your circumstances change. But with Northern Rock also tightening up the rules on its flexible mortgages, some of these deals are looking a lot less user-friendly now that the economic backdrop isn’t so rosy. Ray Boulger at broker John Charcol says if borrowers don’t have confidence that they can use these home loans in the way they expect, “it destroys the whole concept of having that type of mortgage”.

It doesn’t help that Abbey’s flexible loan is a pretty complex beast. It is made up of three parts – the mortgage loan, a savings pot, and your “available funds”. The available funds are the difference between what you’ve borrowed (ie, the loan) and the maximum you are allowed to borrow (your credit limit). Abbey describes this facility as like an overdraft; you can “draw down” funds up to the maximum as needed. If you overpay, you can put this money into your savings pot, which is offset against the loan, or do what Cuckow did – pay it off your mortgage,­ thereby increasing the available­ funds.

He was surprised to discover the new figure for what his one-bedroom flat is allegedly worth was an automated valuation­ based on Halifax’s house price index­, which Abbey said, “provides us with an updated estimate each quarter of the purchase price of properties in your region”.

After Cuckow complained, Abbey dispatched a surveyor to carry out a formal valuation, which put the value at £145,000 – some £15,000 more than the original valuation (and £2,000 more than he paid for it), and suggests the bank was wrong to swipe all his available funds.

“The basis they use for valuing properties is seriously flawed – it’s massively undervaluing,” says Cuckow, who lives in Horsham, West Sussex, and works in emergency planning for a local authority. He claims Abbey’s aim seems to be “to take the risk off their books by grabbing any available funds,” adding: “This mortgage has never been more affordable – it’s a tracker at 0.49% above base rate – and I’ve never missed a repayment.”

Abbey told us it regularly reviews people’s credit limits in line with house prices, to ensure the mortgage balance and available funds do not, together, amount to more than 90% of the property’s current market value.

“Where it does, we reserve the right – as clearly stated in the terms and conditions – to withdraw any available balance over the 90% LTV limit which is not being used,” its spokeswoman says. “This is a policy we have had for a number of years, and is in line with our prudent and responsible approach to lending. It protects the customer by ensuring they do not end up with negative equity.”

She added that in Cuckow’s case, “the payments he has made have been capital repayments, not money saved into his savings pot, and so has reduced the overall balance of his mortgage. We have, as promised, carried out a valuation of Mr Cuckow’s property … he understands that if he wants to make additional payments, he should make these to his savings pot and not as capital reductions.”

Cuckow’s mortgage account has now been rejigged to reflect the new valuation, and his available funds restored to their previous level. But he is taking no chances. “I’ve moved the full balance into a separate savings account where Abbey can’t get its hands on it.”

What is a flexible mortgage?

Many mortgages now come with flexible features, such as the ability to make overpayments, take a payment holiday or pay less each month. And some deals offer an “offset” facility, where you use your savings cash to reduce the amount of interest you pay on your mortgage.

Earlier this year, the Co-operative Bank issued figures showing that the number of home loan customers making overpayments had increased by 50% in the last year. Many had decided to pay more because their mortgage rate had plummeted as a result of Bank of England interest rate cuts. Low savings rates are another reason why it can make financial sense. In the past, when house prices have been rising, flexible mortgages were a controversy-free zone.

But Justin Cuckow’s experience indicates that if you have got a flexible/offset home loan, or are planning to get one, it is worth checking the small print to see if there is anything that could come back to haunt you if house prices were to continue falling.

Ray Boulger, at mortgage broker John Charcol, says: “In general, I would say any overpayments you are in a position to make, should always be paid into the linked savings or current account rather than into the mortgage.”