This content is for information and inspiration purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice regarding your affairs please consult an independent financial adviser.
As COVID-19 and the slowly-lifting lockdown have continued to disrupt the UK economy and households’ finances, many have been drawn to the government’s initiative offering “mortgage holidays” to people who are struggling to meet their monthly payments due to the pandemic. Whilst this policy will be much-needed by many families such as the JAMs (i.e. “just about managing”) and those who have lost work, our financial advisers here at Cedar House would urge families to think carefully before rushing into a mortgage holiday.
This decision is likely to carry important consequences down the line, so it should not be made lightly. We offer this short guide on the financial implications of mortgage holidays to help you in your thinking regarding this crucial topic. Please contact our financial advice team here at Cedar House for more information or to access personalised advice:
020 8366 4400 or enquiries@cedarhfs.co.uk
A brief overview of the scheme
For those currently unaware of how the new mortgage holiday scheme works, lenders across the UK have been offering support since March 2020 to homeowners who have lost income or employment due to COVID-19. Those with a mortgage are able to request up to three months’ suspension from their monthly payments, which includes those with a Buy To Let mortgage. It could allow some much needed “breathing space” for a household which suddenly finds itself in financial hardship, possibly granting time to find other employment or work so the monthly mortgage payments can be picked up again.
Applying for the three-month mortgage holiday is fairly straightforward (although not guaranteed to be granted). You would simply need to contact your lender and explain how COVID-19 has reduced your monthly income, resulting in your need for a mortgage holiday. No test (e.g. for affordability) is needed and the process is usually quite quick. No additional fees or charges should be involved, although unpaid interest will likely still need to be paid. The application and award of the mortgage holiday should not affect your credit score.
Please bear in mind that if you want to apply for a mortgage holiday for reasons unrelated to COVID-19, then a separate set of rules are in place which you will need to follow.
The financial implications of the holiday
Does the offer of a mortgage holiday amount to “free money”? No, it does not. Few things come for free when lending and banks are involved. At present, around 2m UK households have set the pause button on their monthly mortgage payments, yet the majority will almost certainly end up paying higher repayments in the future. For some borrowers, this might only amount to a £20 extra per month. For others, however, there have been reports of monthly increases of up to £200, which could stretch many families to financial breaking point.
In short, those seeking a mortgage holiday will likely need to pay for it in the long run. Whatever you did not pay during the three months is almost certain to be added to the total mortgage, so be careful to consider seeking professional financial advice if you are considering this option to ease the short-term strain on your finances.
Other important thoughts
It’s significant that banks across the UK have reported “panic holidays”, where certain people have applied for a three-month mortgage holiday too soon out of a sense of panic. Just as it is crucial not to impulsively “panic sell” your investments when the stock market goes down, homeowners should be careful to weigh all other options carefully before applying for a mortgage holiday. Be especially careful about not just simply cancelling your direct debit to your lender, which can result in disastrous penalties and a damaged credit record.
For those with only a short amount of time left on their mortgage, our financial advisers at Cedar House urge people to be especially careful. Generally speaking, mathematics will not work in your favour to apply for a mortgage holiday. The monthly repayment costs will likely be much higher once the holiday is lifted compared to someone nearer to the beginning of their loan.
If your household is very limited in its monthly budget options in the wake of COVID-19, then an option to consider with your adviser is switching to an interest-only mortgage for a limited period (e.g. 12 months). Some lenders are offering this as an alternative to the mortgage holiday and it could end up costing you less over the long term. Interest-only mortgages are usually lower than repayment mortgages, so this could “free up” hundreds of pounds per month for your family in the short term as we navigate through the pandemic.
Invitation
For most homeowners, their mortgage is likely to be their biggest monthly expense. So it makes senses to consider options to reduce unnecessary costs, where possible, even in the best of economic times – let alone in the circumstances we all currently find ourselves in. However, given the potential stakes involved it is wise to at least consider professional financial advice before making significant decisions about your home loan.
If you would like to discuss your financial plan with a member of our team, then get in touch today to arrange a free consultation:
020 8366 4400 or enquiries@cedarhfs.co.uk.