During the last week, unsurprisingly, I have received calls from a number of clients asking about the ‘Mortgage Payment Holidays’ that are being offered as a way to ease financial pressure during the coming weeks and months. In this article I’m going to breakdown the key questions, and hopefully leave you with the information needed to make an informed choice.
What is a mortgage payment holiday?
Definition according to the money advice service is as follows:
“A mortgage payment holiday is an agreement you might be able to make with your lender allowing you temporarily to stop or reduce your monthly mortgage repayments.”
Last week most mortgage lenders agreed with the Chancellor that they will offer ways to help their customers with mortgage commitments, whilst we deal with the impact and challenges of coronavirus. It’s worth remembering that this is something that lenders have voluntarily agreed to, not something that they must do.
Is a mortgage holiday a good thing?
When somebody talks to me about any kind of a holiday, then in my mind I start to create a really positive picture. We all love holidays, don’t we? A time to kick back, relax, and take a break. So, a mortgage payment holiday must be a good thing too then?
Please remember that your account does not stop, or pause, you are simply being permitted to have a few months off from making payments. For every month that you take the holiday, you are increasing the size of your mortgage debt by the amount of that payment. After the 3 months have ended, your mortgage payments will need to increase to repay the higher loan amount.
What’s the real cost of a payment holiday?
Yesterday evening I created a mortgage illustration to check for myself. I assumed a house value of £300,000 and that the mortgage loan is £222,000 with the term remaining as 23 years. I selected a 5 year fixed rate mortgage with an initial rate of 1.79% which would revert to the standard variable rate of 4.24% after the fixed period. The payments were a little bit less than £1,000 per month – The cost of ownership for the 23 year term of the mortgage was slightly over £319,000.
I then created a second illustration with 3 payments added on. The loan size is therefore £325,000 now, and with all other terms remaining the same, the cost of repayment over 23 years increased to £323,395.
By adding £3,000 to the loan size, we’ve increased cost by £4,395 , so it’s cost £1,395 in interest. This equates to increasing the cost of the next 3 mortgage payments by 46.5%.
Do I have to take a 3 month payment holiday?
The option is being offered as a way to help, but you don’t have to take it. As I’ve just explained there is a short term gain, but there’s also some long term pain, and you need to ask yourself if it’s worth it.
I’m not sure if I need the holiday, how can I avoid the additional interest cost?
If you want to keep your options open, then it may be worth applying for the 3-month break. I strongly recommend keeping those 3 months payments to one side and avoid spending the money if you can. Once life return to a more normal state:
- You could take advantage of the option to make lump sum overpayments to reduce the balance, if your mortgage product offers this.
- If you don’t have this option, then speak to the lender and ask if you can catch those payments back up.
- Reduce the amount of the mortgage balance by contributing the money the next time you arrange a mortgage review.
How do I apply for a mortgage payment holiday?
I would recommend that if you are going to apply, that you do so online. We have noticed that when we have needed to ring lenders during recent days, that the phones are taking longer to be answered. This will be because there are less people, due to teams working from home, or the offices trying to comply with the 2 metre rule.
I really hope that this information has been useful for you, and will help you to make an informed choice about what’s the best thing to do for you and your family.
Best wishes, take care