Yahoo Finance Mortgage holidays: a break is tempting, but it will cost you
Almost one in five UK mortgage holders have now been granted a payment holiday, it was estimated this week – but people’s experiences of the process have been very different. Some struggled to get a holiday while others say it was almost too easy. And while for some it will add just a few pounds to their monthly mortgage bill, others say their outlay will rise by a lot more.
The Guardian asked readers who had applied for a mortgage payment holiday, or help with other debts, how they got on. Almost 200 people contacted us to tell us their stories.
Here we look at their main concerns and provide essential need-to-know information and expert advice for anyone considering a mortgage holiday.
For most, a mortgage holiday will mean higher repayments
The increases people face vary hugely. One reader, a Londoner who is currently out of work because of a brain tumour, said he called his bank to explain he was struggling, and that the tenant in his buy-to-let flat had stopped paying rent, and was instantly told he could take a three-month mortgage holiday.
But he added: “I was shocked to be told that the ‘holiday’ is no such thing – merely a pause, after which my payments would increase by nearly £200 per month … When I pointed out that a true holiday would be to extend the life of the mortgage by three months and not increase payments, I got a very frosty response.”
David Porter, who works in IT and also lives in London, also deferred his mortgage payments for three months. His home loan has 14 years left to run.
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“The payment break will add about £20 a month to my mortgage, which seems manageable, but of course this will all add up over the course of the mortgage lifetime,” he said. “If all is well income-wise, I intend to overpay over the next year or two.”
Lee Young, 49, who lives in Nottingham and has been furloughed, has a 28-year mortgage with 15 years left to run. The current balance is roughly £60,000 and his current monthly payment is about £350. It will rise by about £5 a month.
Perhaps worryingly, quite a few of those who contacted us appeared to have little or no idea how much extra they will have to fork out. Several told us that when they called to ask about a break, their lender had given them no information about how much the new payments would be.
Need to know “Payment holiday is a misleading description for what is actually a payment deferment,” says Mark Harris at the mortgage broker SPF Private Clients.
The standard position at most lenders appears to be that you pay more each month in the future, while the term stays the same.
Typically, lenders are spreading people’s deferred payments over the outstanding term of their mortgage. On top of this, during the holiday, the lender continues to charge interest and adds this to the amount you owe, which increases the balance it charges interest on.
As a result your payments will be a bit higher when the holiday ends and there will be a (slightly) bigger total amount to repay.
The Financial Conduct Authority (FCA) guidance indicates the default should be a three-month holiday, though it says firms can offer a shorter period in certain situations.
Because the missed payments are being spread over the rest of the mortgage, the shorter the term left on your loan, the larger the monthly rise once the holiday is over.
Halifax gives the example of someone with a £100,000 repayment mortgage at a rate of 2.75% with a 20-year term remaining. Following a three-month holiday, their monthly payment will rise by £9 – from £542 to £551. Because the balance is remaining higher for three months, the total amount to repay goes up by £485 to £130,605.
If you change a couple of numbers – reduce the term remaining to seven years and halve the mortgage size to £50,000 – the monthly increase is a lot bigger: £27 (from £655 to £682). That’s £324 extra over a year. In that case the total amount to repay goes up by £195 to £55,219.
However, let’s now assume the mortgage is interest-only rather than repayment, but keep the other details the same. In that scenario, the monthly increase is very small: £2 for the £100,000 loan and £1 for the £50,000 one.
According to Martin Lewis’s MoneySavingExpert.com, the “vast majority” of mortgage holiday applicants are being told their monthly payments will increase by less than £50.
The UK’s official Money Advice Service says: “Your lender should explain the impact of any option on your monthly payments.” So if you have not been told this information, you must ask for it. MoneySuperMarket’s website has an easy-to-use payment holiday calculator that will give you a good idea of the increase.
Payment holidays and credit ratings
Many people told us they had been informed that taking a payment holiday would not affect their credit rating – though some were worried this might not be the case.
Luke May, 31, who lives in Derbyshire, said he and his partner were coming up to their first year in their first home together, and have had to defer their mortgage payments for three months. “My partner will need a new car soon, and we are due to remortgage next year – we are worried our good credit scores will not be enough to secure better deals,” he said.
Need to know The government, the FCA and lenders have all stated that taking a payment holiday will not affect an individual’s credit rating.
But remember that while the UK’s credit reference agencies hold the data that makes up someone’s credit score, these bodies do not decide whether someone can obtain credit – that is up to individual lenders, who are free to choose to whom they wish to lend. If you are expecting to apply for any kind of credit in the next couple of years, the fact you took a break may limit your options.
Seeking future borrowing
Again, some were concerned about whether taking a payment holiday may have an adverse impact when they later come to switch their mortgage to another firm or want to increase their borrowing. Jim, a 42-year-old train driver from Kent who has been furloughed from work, told us: “Hopefully it will not affect any future borrowing. However, you never know with the banks. The proof will be in the pudding when we go to remortgage.”
Need to know Mortgage holders on payment holidays can switch to a new deal offered by their existing lender at the end of their term, but it’s not so simple when it comes to remortgaging to another lender.
Chris Sykes, a consultant at the mortgage broker Private Finance, says if you require new finance in the next six months – a remortgage with a new lender, say – a payment holiday will make your application less likely to be accepted.
He told Money that while some lenders are becoming more flexible, “others who are more reserved in terms of what they lend … would look unfavourably on you having a payment holiday”.
It’s fair to say that using a mortgage broker may not be a bad move, as they will have a good idea about which lenders are most likely to be accommodating.
What about if you still can’t afford payments when the holiday is over?
This is clearly a worry for many – though it may be that the holidays are extended beyond three months.
Joanna, a freelance writer in Edinburgh, was granted a payment holiday on her mortgage and on two bank loans.
She fears more debt when the crisis is over. “I know I will struggle to get work again when things calm down, and it will take me months to get back on my feet – but all these banks and utility providers will come for their money in three months. It is giving me sleepless nights and chronic anxiety.”
Need to know The FCA says that at the end of the holiday, if you are still not able to make your full payments due to the crisis, your lender may, if appropriate, offer you a further payment holiday or other assistance.
Citizens Advice points out that at the moment your mortgage provider should not try to repossess your home, and should pause any action it is already taking until at least 18 June 2020.
So should I apply for a mortgage payment holiday?
It’s not too late to ask for one, but Sykes says his view is that if you can avoid applying for one, do. Those who do request one will need to self-certify their income has been either directly or indirectly impacted by the coronavirus pandemic.
In many cases there will be other options: Barclays is among the banks allowing some borrowers to switch to interest-only payments for up to 12 months. Alternatively, some will allow you to increase the length of your mortgage term. Both of these will mean reduced monthly payments, but at a cost in the future.
