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.

Recommended

Hong Kong’s crown slips as Singapore takes over
Asian economy

Hong Kong’s crown slips as Singapore takes over

As international sentiment sours on Hong Kong, other Asian financial hubs – primarily Singapore – are snapping up business.
6 Jul 2022
Price of gas soars as Moscow turns off the taps
Gas

Price of gas soars as Moscow turns off the taps

As Russia cuts its gas exports to the EU, the price of natural gas continues to rise. Restricted supplies could see energy rationing and recession i…
6 Jul 2022
Low growth and high inflation: a toxic cocktail for anxious markets
Stockmarkets

Low growth and high inflation: a toxic cocktail for anxious markets

Low growth, high inflation, central bank tightening, a strong dollar, and the risk of recession is proving a toxic cocktail for world stockmarkets – a…
6 Jul 2022
How to cut the cost of childcare
Personal finance

How to cut the cost of childcare

Childcare is expensive, yet few people are drawing upon all the government support they are entitled to. Ruth Jackson-Kirby explains what help is avai…
6 Jul 2022

Most Popular

Ray Dalio’s shrewd $10bn bet on the collapse of European stocks
European stockmarkets

Ray Dalio’s shrewd $10bn bet on the collapse of European stocks

Ray Dalio’s Bridgewater hedge fund is putting its money on a collapse in European stocks. It’s likely to pay off, says Matthew Lynn.
3 Jul 2022
Persimmon yields 12.3%, but can you trust the company to deliver?
Share tips

Persimmon yields 12.3%, but can you trust the company to deliver?

With a dividend yield of 12.3%, Persimmon looks like a highly attractive prospect for income investors. But that sort of yield can also indicate compa…
1 Jul 2022
Is inflation about to drop as recession takes hold?
UK Economy

Is inflation about to drop as recession takes hold?

Central banks are raising interest rates in an attempt to curb soaring inflation. But will that push the economy into recession? John Stepek looks at …
5 Jul 2022