Banks are urging mortgage borrowers to think carefully before taking a further mortgage holiday after the Government officially extended the initiative by three months.
Some 1.8million homeowners have opted to take a mortgage holiday since the lockdown began in March.
Now, these same homeowners can opt to extend their break by a further three months, as the economic impact of coronavirus continues to be felt.
However, banks and building societies warn that doing so could severely hamper your ability to refinance in future, as well as costing you a lot more in the long run.
The FCA says customers yet to apply for a payment holiday have until 31 October to do so
The banks themselves estimate that somewhere between 60 and 70 per cent of customers are still financially healthy enough to resume full payments once their mortgage holiday ends.
This could mean that many of the 1.8million households that originally took a three month mortgage holiday did so as a precautionary measure rather than because they couldn’t afford their mortgage.
Trade body UK Finance has warned those that can afford to repay that taking an extra extension on their mortgage holiday will end up costing them a lot more in the long run.
The FCA’s Christopher Woolard also says that if customers can afford to restart payments ‘it is in their best interests to do so’, but support will be given to those who can’t.
Banks will rake in hundreds of millions of pounds in extra interest off the back of the payment holidays already granted, and taking a mortgage holiday will cost you more in the long run, whichever way your bank asks you to pay it back.
For example, if you took a three-month payment holiday for a mortgage that started in January this year of £100,000 with 20 years remaining at the average two year fixed rate of 2.03 per cent.
After your mortgage holiday, your monthly payments will go up from £505 to £515, and you’ll pay an additional £925 in interest over the lifetime of the mortgage.
However, taking a six month holiday on the same terms would see the total interest over the life of the mortgage rise to £1,905.
This is more than double the three month holiday, because the interest on the loan compounds while you’re not paying it.
Broker Habito has launched its own calculator tool which you can use to figure out how much more you would owe if you took a holiday on your mortgage, which you can find here.
Stephen Jones, UK Finance chief executive, said: ‘A payment holiday may not be the right choice for everyone, and borrowers should only apply if they need one.
‘Any borrower who is concerned about their financial situation should check with their lender as early as possible, with providers’ website giving the latest information on the support available.’
More importantly, taking a mortgage holiday could severely hamper your ability to refinance in future.
While doing so shouldn’t affect your credit score, industry insiders have claimed that some lenders are already starting to automatically decline applications for those who have taken a payment holiday.
Mark Gordon, director of money at Compare The Market said: ‘Despite the name, a mortgage payment holiday is only a deferral of payment. It will need to be repaid at a later date and interest will still accrue during this period.
‘If you are unsure of what is the best option for you, getting in touch with your lender will help you make an informed decision and you can discuss whether alternative options could be better suited to you during this period.’
The current ban on repossessions has also been extended to October the watchdog confirmed
Chris Sykes from mortgage broker Private Finance said: ‘When the mortgage repayment holidays scheme was announced, the government stressed it would not have an adverse effect on borrowers’ credit reports. That remains the case.
‘But, if you require new finance in the next six months, in terms of a remortgage with a new lender, or going back to your existing lender, a repayment holiday will make your application less likely to be accepted.’
On top of this, industry experts have told This is Money that taking a six month holiday will make lenders see you as far more of a risk than if you just take a three month one.
This is because they are assuming only the worst affected borrowers will be extending their mortgage holiday by a further three months.
How does a mortgage holiday work?
At the moment, lenders are offering borrowers three ways to defer their mortgage payments.
Some borrowers will be able to extend their loan, effectively adding the extra three months onto the end of their term.
Others are being offered the opportunity to increase the mortgage size but keep the same term length.
This means that the mortgage will be paid off over the same period, but the borrower will be paying slightly more each month once payments start again.
Remember though, with both these options you will be paying interest on the sum accrued, meaning you’ll pay more interest overall.
Another option that some lenders are offering is a shorter term repayment plan, giving the borrower the opportunity to pay the debt back sooner over a period of, for example, six months.
Not all lenders will be offering all borrowers all of these options. Speak to your lender to find out which one you might be able to take.
Normally a payment holiday is granted on a case-by-case basis with financial hardship and general situational factors taken into account.
Double check with your lender that taking one now because of coronavirus won’t prohibit you from asking for one in the future.
How to take a mortgage holiday
If you genuinely need a payment holiday then it’s vital you speak to your bank or building society before cancelling your payments – not doing so will mean you are technically in arrears.
A payment holiday can be offered to anyone who asks for one, and borrowers who are behind on commitments should be treated the same as those who are up to date, the Financial Conduct Authority says.
This means you won’t need to be in arrears and in the majority of cases won’t need to show proof of financial hardship to qualify.
You may however need to provide a brief description of your circumstances, the loan details and confirm that you are struggling to keep up with repayments.
You then will be asked how long a break you wish to take and when you want it to start.
Most major banks and building societies now have a payment holiday form online. Visit your bank’s home page and follow the links to coronavirus related advice.
If you don’t have access to the internet or need urgent help, call your lender but be prepared for long delays.
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