WHAT YOU’LL PAY FOR A MORTGAGE HOLIDAY
THE EMERGENCY MEASURE WILL HELP IN THE CURRENT CRISIS – BUT IT WILL COST YOU IN LONG RUN, WRITES TRICIA PHILLIPS
MORE than 1.6 million mortgage payment holidays have been offered to homeowners whose finances have been hit by Covid-19.
That means three months free of payments for one in seven UK households paying back home loans, according to official figures from banking industry body UK Finance.
But what will this much needed mortgage break actually mean for your finances in the long term, and what should you be prepared for?
Even though you’re not making those three repayments you’ll still be charged the interest on them as usual.
To make up for the break, when you start repayments again, your monthly figure will go up.
That’s because you will be paying your usual monthly amount plus the three months’ interest typically spread across the rest of your mortgage term.
This will be the norm – but there are some lenders who may offer to extend the length of your mortgage to take in the repayment holiday.
This would permanently reduce your monthly repayments – but in the long run it is likely to work out more expensive than the more common repayment holiday.
So, if you are considering taking a mortgage holiday or extending your mortgage term, it’s important to find out which will work best for you – based on your mortgage balance, the term and the interest rate.
Matthew Boyle, mortgage specialist at finance comparison site finder.com, said: “Monthly mortgage repayments are one of the biggest outgoings so a payment holiday can seem an attractive option – especially in an extremely difficult time like this.
“But it will cost you more in the long run, so people who can survive without it should think twice.”
To help you, let’s look at how a three-month mortgage holiday would affect three different homeowners.
■ SCENARIO ONE: You’re a first-time buyer one year into a 30-year mortgage with a balance of £170,000.
Taking a three-month break would cost you £1,090 more overall and your monthly payments would increase by around £10 from £732 to approximately £742 when you start repaying after the mortgage holiday.
■ SCENARIO TWO: It’s a similar picture if you’re a family upgrading to a bigger, more expensive home with 20 years of a 30-year mortgage left and a loan balance of £220,000.
Overall, a three-month mortgage holiday would cost you £1,210 more and hike monthly repayments by £20 from £1,220 to £1,240.
■ SCENARIO THREE: You’re an older borrower with an outstanding balance of £55,000 and just seven years left to pay.
In this case, a mortgage holiday would cost just £237 more overall.
But the biggest difference can be seen to your monthly repayments – with your pre-holiday payment of £727 rising by £30 a month to around £757.
Emma Lawrence, mortgages director at Halifax, one of the biggest lenders, said: “Mortgage payment holidays are helping to give breathing space and flexibility for those who need it in the current challenging times.
“Borrowers should always consider the extra interest and payment increase at the end of the holiday. But because many people are facing unexpected challenges with their finances, being able to defer payments for up to three months can provide some extra time without having to extend the mortgage term.”
ARE THERE ANY ALTERNATIVES?
YES. Some lenders are allowing the mortgage term to be extended.
This reduces the monthly repayment but will increase the total amount a borrower will pay. In all our three scenarios it would end up costing the borrower more overall if, for example, they were to extend their term by two years.
The first-time buyer would see monthly repayments drop by £30, but it would cost a total £5,500 more than taking a mortgage holiday.
For the family with a larger mortgage, a two-year extension would cost £6,760 more, despite repayments reducing by £81 per month.
For our older borrower with just a few years left to pay, it is still more expensive to extend the term – £1,540 dearer than taking a mortgage holiday. But the monthly repayments would decrease significantly, by £145.