A MORTGAGE holiday might sound like a bit of a lark, but for the estimated one in six of us who have had to take them it hasn’t proved a particularly restful vacation. Back in the early days of lockdown, chancellor Rishi Sunak said that banks would allow customers a three-month break from their mortgage payments if they couldn’t pay them due to coronavirus.
He later extended this for a further three months, meaning that some borrowers will not have paid a penny on their home loans since March.
You have until October 31 to request a holiday on your mortgage, so many more people may now be considering this as an option as furlough comes to an end and more people lose their jobs. But experts warn that it isn’t an option to be taken lightly and there may be better alternatives for the financially stretched.
‘The mortgage payment holiday has been a lifeline for many customers,’ says Miles Robinson, head of mortgages at online mortgage broker Trussle. However, he warns that some borrowers may be unaware of the true cost of taking a break from monthly payments, which may lead to huge increases overall, as well as difficulties in applying for new loans.
‘I don’t think it was super-duper clear that you should only take a mortgage holiday out of absolute necessity,’ he says.
‘The banks were very under-resourced when they were handing them out and people were allowed to essentially self-certify whether they needed one or not.’
He urges those who have taken a break from their mortgage payments to look carefully at their finances and work out whether they can start paying again. ‘There’s a grey area when it comes to the impact of these holidays, and it’s best not to take one unless you absolutely need to.’
WHAT IS A MORTGAGE HOLIDAY?
Quite simply, a mortgage holiday is a period during which you don’t have to pay your monthly mortgage payments. You can’t just stop your direct debit, however, you need to phone your lender first and inform them that your finances have been affected by coronavirus.
At first, you will be probably be offered a payment holiday of up to three months, but if you’re still experiencing difficulties at the end of this period, you might be able to get it extended by another three. You won’t lose your home and you won’t trash your credit rating if you take one of these holidays, which are both possibilities if you simply stop paying your mortgage under normal circumstances. However, you will still have to pay the money back, with extra interest, and payments in the months afterwards are likely to be higher to make up for the missed months.
HOW THE FIGURES ADD UP
Mark Harris, chief executive of mortgage broker SPF Private Clients, says that the government’s communications may have made things worse by using a word like ‘holiday’, which made it sound like customers were being given something for free, so that many have misunderstood the cost.
‘More appropriate terminology could have been used, including the more accurate term ‘deferral’ rather than holiday. Some borrowers may have mistakenly believed they were getting “free money”’, he says.
In fact, a mortgage holiday can add thousands of pounds to your payments over time, and for those near to the end of their mortgage terms it can lead to sharply increased monthly payments.
Figures from mortgage technology group Koodoo and website money.co.uk found that the average cost of a three-month payment holiday could add £665 to the amount you repay in total, while a six-month holiday would cost £1,331.95. For those with a larger average mortgage or a higher interest rate, these figures may be even higher.
You can use the calculator here at mortgage broker Habito (habito.com/mortgages/mortgage-holiday-calculator) to work out what the cost would be for your mortgage.
A STING IN THE TAIL
While it is obvious from this that a mortgage holiday could provide you with some breathing space, you need to be prepared for what will happen when you come to the end of the holiday period.
Your lender might offer you several options for repaying the extra money, including higher monthly payments going forward, or extending the mortgage term so that you pay for longer. A longer-term mortgage means bigger interest payments overall, but could be more manageable if you have experienced a serious drop in income.
They may also offer you the option of an interest-only mortgage period if you really cannot afford to start repayments. With an interest-only mortgage, you do not pay off any of the loan you originally took out, merely the cost of borrowing the money. At the end of the mortgage period, you still owe all of the money that you borrowed for the house.
This type of mortgage may affect your credit rating, as well as leaving you with issues over how to pay for your home at the end of the term.
A REMORTGAGING PROBLEM
As well as being expensive, mortgage holidays could make it harder for you to get another mortgage in future, or even to move your existing mortgage onto a cheaper rate.
Sunak promised that these payment breaks would not affect borrowers’ credit scores, but brokers warn that mortgage lenders don’t just rely on these scores when deciding whether or not to lend.
‘Questions remain as to how exactly the lenders will view borrowers that have taken mortgage holidays. Currently, we believe it won’t affect your credit score, but that doesn’t mean banks won’t take it into account next time you apply for finance,’ says Hina Bhudia, partner at Knight Frank Finance.
Katie Brain, banking expert at financial information service Defaqto says that lenders are becoming stricter on how they view these breaks, as well as more reluctant to lend to those who are on furlough. ‘All the providers have different views but they are all getting nervous about coming redundancies,’ she says.
James Chisnall, from City Finance Brokers, agrees that lenders are becoming stricter.
‘If you’ve taken a holiday, it is going to be harder to get the very best rates, but there are still good rates available if you know where to look,’ he counsels.
OTHER OPTIONS IF YOU ARE STILL CONCERNED
If you are worried about money, a mortgage holiday is not your only option, so make sure you’ve considered other ways to budget before stopping monthly payments.
If you are on your lender’s standard variable rate, you may be able to reduce your monthly mortgage payments by moving onto a cheaper rate, such as a two-year fix.
Miles Robinson, at Trussle, suggests that, even if you are on furlough and can’t get another mortgage company to consider you, your existing mortgage provider should be able to transfer you onto a new deal.
‘But a broker may be able to help you to find something better,’ he adds.
Chris Evans, head of specialist mortgages at Pure Commercial Finance says that some lenders are more willing than others to take on those on furlough.
‘In recent weeks, we have placed cases for clients that have been on furlough and currently on a payment holidays, so there are plenty of lenders around who are looking to take the business on.
‘The general stance of lenders is that a payment holiday on its own wouldn’t prevent you from getting a mortgage but your overall financial circumstances will be looked at and the risk assessed accordingly.”
You should also check that you are claiming all of the benefits you are entitled to, so try the benefits calculator at turn2us.org.uk for more assistance.
IF YOU NO LONGER NEED A PAYMENT HOLIDAY
Have you returned to work? Are your finances now better than you expected? Miles Robinson suggests contacting your lender and restarting mortgage payments as soon as you can.
If you’ve saved money during lockdown, you might also consider overpaying on your mortgage so that you make up the loss.
‘Most lenders will allow you to overpay ten per cent of your mortgage every year without penalty,’ he says.
Overall, it is best to be prudent and consider just as a mortgage holiday can cost you thousands, a mortgage overpayment strategy can save you thousands.
‘We tightened belts, reduced outgoings’
‘WE ARE both self-employed in separate fields,’ says Lauren Peacock who runs child sleep training business Little Sleep Stars.
‘We’d also poured our life savings into a renovation, and so when we were hit by Covid we needed to take stock. We wanted to create financial headroom, so we tightened our belts and thought about how we could reduce our outgoings.
‘We looked at all of the payments that could be deferred, and one of them was our mortgage payment. However, I was really irritated by how much it cost. Stopping mortgage payments would have cost us an additional £1,000.
Lauren (above), from Skipton, who has a four-year old son with husband, Ben, explained that she looked for cheaper solutions than stopping a mortgage payment.
‘Instead, we both applied for interest-free credit cards and used them instead where we needed a bit more cash. We’ve not maxed them out and we’ve got a plan to pay them back.’
‘My monthly payments have gone down’
ROSE DEAKIN, from Loughborough, has ended up better off despite taking a mortgage holiday, because her tracker rate on her mortgage has dropped so low.
The social entrepreneur (pictured) runs The Crop Club which sells sustainable growing kits, but also makes money renting out rooms in her home.
‘When coronavirus hit, I had just finished redecorating a room to rent out, but I haven’t felt comfortable advertising for someone new to move in. I have one lodger at the moment paying rent, which helps, but I wasn’t sure at the beginning of lockdown if they would be able to pay rent,’ she explains. She was also conscious that her zero-hours contract with Loughborough University may not be available in future, although it has been honoured, so far.
‘I was lucky with my mortgage as I am on a tracker and the rate dropped very low with the base rate dropping, so I decided the break would be more beneficial to me than the short-term impact of slightly larger payments,’ she says.
‘I have just been checking my finances and my monthly payments have gone down after my three-month mortgage holiday because my interest rate dropped so significantly. It is only a £6 drop but I’m lucky it hasn’t gone up.’