The Government and the mortgage sector have offered mortgage payment holidays to homeowners and landlords needing financial support during COVID-19. But as mortgage payment holidays cost borrowers more in the long term, what other options are there? Managing Director, Steve Olejnik takes a look...
As COVID-19 has prevented many people from going to work, placed a significant number on the Government's furlough scheme, and worse, lost others their jobs, the Government has been working with the mortgage sector to provide homeowners and landlords with the option of a mortgage payment holiday.
But a mortgage payment holiday should not be undertaken lightly and as landlords will need to evidence genuine hardship (not just that their tenants have stopped paying rent), a payment holiday may not be an option. We take a look at alternative options to a mortgage payment holiday.
Why would I not take a mortgage payment holiday?
There are several reasons why you may not want to take a mortgage repayment holiday. Firstly, and most importantly, any payment holiday will not give "free money", but simply defer the payment to later in the mortgage. As a result, not only will you still be required to pay this money back, but you will also accrue extra interest on the deferred payments, increasing your total level of borrowing.
While the payment holiday won't be marked on your credit file or damage your credit score, you may find it more difficult to raise funds from the lender in the future. For example, if you are a landlord looking to take out further mortgages on new properties or extend your mortgage with the lender in the near future, they are likely to remember your inability to pay back your existing debts during this time.
What Are the Alternatives to Payment Holidays?
Before seeking a payment holiday from your lender, it is worth having a look at our alternatives, to see whether these would work for your circumstances. I would recommend speaking to a mortgage broker to find the best option for your circumstances.
Some mortgages have a feature which allows you to reduce your monthly payment by a fixed amount, or "underpay". If your mortgage allows this, you will be able to pay a reduced amount. The minimum amount you will be required to pay usually will at least cover the interest payment. Underpaying will help if your income has been reduced, but you are still able to pay part of your mortgage.
What is the benefit of underpayments? Well, as you are continuing to pay part of your mortgage, less money if deferred and added to your mortgage, so you will pay less than a mortgage payment holiday overall.
Find a Lower Rate
If you are in a position where you can remortgage, an obvious option is to remortgage onto a lower rate. But what happens if you are in your fixed-rate period? Most people don't consider breaking their fixed term, due to the often expensive Early Repayment Charges, but as interest rates as so low at the moment, you may still find it's worthwhile.
A decent broker will be able to do the leg work for you on this and tell you whether it's worth considering.
Extending the Mortgage Term
If you are eligible to remortgage, or if you agree to this with your lender, you may consider extending the length of your mortgage. Extending your mortgage will reduce your monthly cost as it spreads the repayment over a longer period. While you will incur more interest overall, many mortgages allow for an element of overpayment, so once your finances return to normal you would be able to overpay, which will lessen the financial impact of extending the term. You would also be able to reduce the length of the mortgage at your next renewal if you meet your lender's criteria.
Lastly, as it is likely to have the longest-lasting impact, is moving to an interest-only mortgage. This is not an option we would recommend in most cases. Often, a payment holiday, or one of the other options above, would be a better solution in the long term.
Moving to an interest-only mortgage will reduce your monthly payments as you will only be paying off the interest. Not all lenders will allow you to do this, so you will need to speak to your lender or broker to check you would be eligible. You will need to have a strategy in place for repaying the balance of the mortgage later down the line, and your lender will require you to outline this to them at time of application, to make sure you will not be left unable to repay it. We would stress the importance of seeking advice from a broker before choosing this option due to the long-term financial implications.
If you are concerned about your ability to repay your mortgage, our advisers are here to help. Call 0345 345 67 88 or email firstname.lastname@example.org to discuss the most suitable support option for your circumstances.