Beware: a mortgage holiday is not free cash
You are piling up debt for the future if you pause your mortgage payments, says Ruth Jackson-Kirby.
The government has announced that lenders have agreed to give homeowners and landlords a three-month repayment holiday on their mortgage to combat the financial turbulence many of us face.
“You won’t have to go through any kind of means test or provide evidence that you have been affected by the coronavirus crisis to claim,” says David Byers in The Times. It is an unprecedented move that could prove invaluable for homeowners who have no idea where their next pay packet will come from.
But it is not free money. Don’t be fooled by the term “holiday”: you will pay for this break down the line. This is causing concern for lenders who don’t think the government has been clear about the downside of a repayment holiday, notes Nicholas Megaw in The Financial Times. The CEO of one mortgage lender told the FT that “[customers] are just piling up more debt for later”.
Piling up more debt
“Under a payment holiday, the money is still owed and interest continues to accrue, so if customers can still afford to pay something they should consider other options with their lender to allow them to do this,” Eric Leenders of UK Finance, a group of banks and financial services providers, told the FT.
For example, if you had a £150,000 mortgage at 3% over 25 years your monthly repayments would be £711, including £375 interest. Take a three-month repayment holiday and you would still owe £1,125 in interest when the break ends. That sum would be added to your future repayments.
If you are worried about being able to afford your mortgage repayments during the crisis there are other options, so don’t automatically opt for a payment holiday. You could try to come to an arrangement with your lender to make reduced payments over the next few months. One option could be to switch to interest-only repayments during the crisis. For a £150,000, 25-year mortgage at 3% interest that would almost halve repayments to £375.
Alternatively, you could extend your mortgage term. This could be a particularly attractive option if you haven’t long left on your mortgage. For example, someone with five years and £50,000 left on their mortgage with a 3% interest rate would be repaying £898 a month. Extend the term by just two years and you would shave £237 off your repayments. But you will end up paying more interest.
If you do decide to take a mortgage holiday or cut your payments for a certain period, don’t forget that once life returns to normal you could make an overpayment to clear any interest that built up during the crisis.
Whatever you decide, speak to your bank before you either change or cancel your direct debit – although this is easier said than done at present. “Most of the big mortgage lenders are…swamped by calls,” says Byers.
Some banks are saying yes across the board to speed up the process; most are asking you not to call unless you can’t afford to pay your next mortgage repayment. If you want to take a mortgage repayment holiday, check your lender’s website to see if you can apply online.