By Adrian Whitten, financial services business principle at Balgores Property Group
When the government announced a 3-month mortgage “holiday” towards the end of March for those affected by the coronavirus crisis, it came as a huge relief for homeowners throughout the UK. Families already impacted by job losses or illness will now have one less thing to worry about at what is an already stressful time.
But like anything, it comes with drawbacks; just because the help is available, doesn’t mean you should necessarily take it.
We take a look at the details, working through whether a mortgage holiday is the right option for you, and your individual circumstances, or not.
You will need to pay it back
What’s being offered is a mortgage break, not a free pass. Whatever you don’t pay gets added to your total mortgage, meaning that when the break is over your payments will go up. So if you are still able to make payments now, it makes sense to carry on as normal, so you don’t face raised costs in future. For example, if you’ve been furloughed but are on 80% pay while your partner is still working for example, you may feel like you are realistically still able to meet your normal mortgage payments with just a small adjustment to your normal lifestyle.
Those who are unable to work because they’ve fallen ill, or for entire households which have been furloughed or made redundant, and are genuinely struggling financially on the other hand, you might want to take advantage of the gesture.
It’s also a comfort to know that whilst your payments will go up after the 3-month break, with interests so low, the impact could be quite minimal anyway – depending on how long you have left on your mortgage (for example if you only have a few years left, the extra money will have to be spread over a shorter time).
Wait until you really need a mortgage holiday
In the same way that some employers panicked and furloughed employees before they really needed to, some homeowners have jumped too early. If you’re still doing ok, and with many people’s monthly outgoings lowered at the moment, it makes sense to wait until/if you really need the help – for your own financial implications, but also to make it easier for those who desperately need one to get theirs sorted first.
We’re all a bit uncertain of what the future looks like, so all the while you do have a steady income, it’s best to use that wisely.
Switching to interest-only mortgage payments is another option
If meeting your normal payments would place you under too much hardship, why not consider just paying your interest instead. This could potentially cut your payments in half, and is an option being offered by banks like Barclays.
It simply means you will only pay the interest charges on your loan, not any of the capital you originally borrowed. Interest-only lending was very popular during the financial crisis of 2008, and is still very common among buy-to-let landlords.
A mortgage break won’t impact your credit rating during covid-19
If you’re struggling, but reluctant to take up the offer, for fears it will negatively impact your credit score, it’s good to know that agencies like Experian and Equifax have agreed an emergency payment freeze to make sure your current credit score is protected for the duration of an agreed payment holiday.
Which brings us on the next point…
Don’t just cancel your direct debit payments!
Whatever you do, don’t just stop payments without an agreement in place with your lender! This will have an impact on your credit rating, be in no confusion about that.
We know the phone lines can be a bit of a nightmare at the moment, with unprecedented demand, coupled with reduced staff, or staff having to work from home, but it really is essential that you reach an agreement first.
Not only is it a breach of your contract, but it could make borrowing money in the future extremely difficult. To keep your credit score protected keep making regular payments until you’ve discussed your position with your lender.
Have a little patience, and try and reach an arrangement that works for both of you. It’s also a good idea to check on your credit score each month just to make sure there are no mistakes.