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Mortgage Payment Holidays: what you need to know

Over 1.8 million mortgage customers have taken a mortgage payment holiday to date.  According to UK Finance, this equates to one in six mortgage borrowers and is for an average of £775 a month. Homeowners needing help with their payments have an outstanding loan of £136,000 on average.

The Government recently announced that mortgage payment holidays could be extended by a further three months if necessary. The scheme, which began in March, has been prolonged until 31st October and the date for new applications has also been extended so that if you apply in October, the relief from payments would take you through to January 2021.     Laptop_working

This news has been welcomed by many borrowers who felt the original June end-date would have posed a financial cliff-edge. Nonetheless, the Treasury has said people should try and resume making their payments wherever possible.

What factors do you need to consider when deciding whether a mortgage payment holiday is right for you?

For:

  • While it’s important not to treat a payment holiday as free money, it is relatively cheap. The deferred payments will still need to be paid and the interest will accrue, but mortgage rates are relatively low at the moment and as the cost is usually spread over 20 years or more, the increase is likely to be bearable. Money.co.uk and its technology partner Koodoo found that someone with a £136,000 mortgage taking a three-month mortgage holiday would see their regular monthly payment jump by £11.21 to £720.22. Over an average 21-year term, this would cost an additional £665.08 in total.
  • Another plus point is that it won’t affect your credit rating. Experian, Equifax and the other agencies have agreed an emergency payment freeze so your credit score is protected for the length of your payment holiday. It will affect your score, though, if you just suddenly stop your payments because you’re having difficulty getting through to your bank. The payment holiday must be agreed.
  • The banks have been obliged to offer this type of payment holiday since the start of the coronavirus outbreak. However, they will check your circumstances and they don’t have to approve everyone. They may reject your application, for example, if you’re still earning and aren’t furloughed.

Against:

  • The word ‘holiday’ might sound appealing but just because mortgage payment breaks are being offered, don’t rush into it. Consider whether you really need one. Have your outgoings gone down anyway? Is your partner still receiving an income?
  • The end date of your mortgage doesn’t get extended. So if you take a three month holiday in a 21-year or 252-month mortgage, you will have to pay it all back in 249 months.
  • Think about how much is left on your mortgage. If it’s a short term one, a payment holiday could prove expensive, as your monthly costs will escalate after the three months for the few remaining years. In this instance, it may be better to switch to an interest only mortgage for a year.
  • Although lenders have promised you won’t get ‘bad credit’ for taking a payment holiday, it may have an impact if you want to apply for credit, especially while the payment holiday is in effect.  For example,if you ask a lender for a £30k further advance on your mortgage, but last month told them you needed a payment holiday, you might be asked to finish the payment holiday first, and prove you can make your regular payments again for a while.

If your income has dropped dramatically, a mortgage payment holiday could be an effective way of reducing your monthly expenditure but it should only be viewed as a short term fix and it’s recommended that you restart your payments as soon as possible.

As ever, if you’d like to discuss your situation in more detail please don’t hesitate to get in touch – we’re happy to help.

 

Sources:

https://www.yourmoney.com/mortgages/cost-of-taking-a-mortgage-holiday-revealed

https://www.bbc.co.uk/news/business-52767058

https://www.theguardian.com/money/2020/apr/04/mortgage-payment-holiday-banks-coronavirus

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