One of the decisions that the government has done to try and assist people who are in financial difficulties during the current Covid-19 virus crisis is to be able to have the ability to take a three month mortgage payment holiday. One of the questions that has come in this week from my Money Circle membership was about whether to take the mortgage payment holiday. And so today I want to talk about whether you should you take the mortgage payment holiday.
What is a mortgage payment holiday and how does it work?
So the first thing just to mention is that taking a mortgage payment holiday is something that’s actually always been available under normal conditions of a mortgage. Many people, when they go through financial difficulties, can take a payment holiday. Historically, there’s been lots of different rules around this facility, such as you had to have made overpayments, potentially to be able to take underpayments in the future. But nonetheless, this facility is not necessarily a new facility.
But in light of the Coronvirus crisis it is something that all lenders now are offering to anybody who has a mortgage. Taking a three month payment holiday doesn’t mean that you get 3 free months of not paying your mortgage. That’s not how it works. The way that this works is that you essentially are adding those payments to your mortgage balance and mortgage term. What happens is your mortgage lender will do a calculation; we’re in March right now so let’s say you did this from April. For April, May and June, you wouldn’t pay your mortgage payments. But from July onwards, those payments would be added to your mortgage liability – whatever your outstanding loan is. The payments that you ordinarily make every month would be re-calculated.
The pros and cons of taking a mortgage payment holiday
One of the implications of that is that your mortgage payments in three months time will be higher than they are right now. If you think about it, that is a great opportunity to be taking some very, very short term decisions to give you that short term increase in cash flow. Let’s say your mortgage payments are £1000 a month, for example, then that’s £3000 that could then go into your emergency fund to provide you with a bit of a back up.
None of us know how long this crisis is going to go on for, so the potential negative impact is that in three months time, if we’re still going through financial difficulties and it’s still having an impact on your financial situation, then you’re going to have to pay those ordinary mortgage payments back and extra. It as it’s a short term solution, but actually, it’s going to cause you more outgoings later on. You’re just deferring that payment. You’re not actually removing that payment.
It means that the total interest that you’ll pay on your mortgage over the term will be greater. For some that won’t be so important because right now, maybe you’re in a position where if you’ve been made redundant, for example, or you have a significant impact on your finances, then this could be a really good opportunity.
I’m worried about the implications: do I need to decide now?
Don’t feel that you need to make a decision on this right now. If you don’t have much of an emergency fund right now, then you don’t necessarily have to do something about this right now. This is just something that is an opportunity for you.
If you decide to take a payment holiday, it will not affect your credit rating. There’s a lot of people worrying that surely if I don’t make payments on my mortgage it’s going to affect my credit rating. If you have this arrangement with your bank, then it will not affect your credit rating.
Don’t just stop paying your mortgage, cancel your direct debit and not talk to them about it. You need to make sure that you pick up the phone and have a conversation with them. A lot of mortgage providers right now are not going through the ordinary affordability assessments because of what’s going on with Covid-19. But they will ask you why you are wanting to take that payment holiday. I’ve read several case studies in the news over the weekend about people that are simply doing this for their mental health and that’s the reason that they have given to their mortgage provider.
It will not affect your credit score, but do make sure you have a conversation with your bank about it. A lot of banks right now are clearly trying to understand this all themselves as well, so give them a little bit of time. But by now, almost a week in, they should have the decisions for you fairly quickly. A lot of lenders are turning this around within 5 to 7 days. So if this is an area that you do want to explore, this could happen for you fairly quickly.
Some lenders such as Nationwide actually have an online opportunity for you to just complete an online questionnaire,and then you can get that sorted fairly quickly.
I haven’t been tested or confirmed, am I eligible for a mortgage payment holiday?
You don’t have to have the Coronavirus to be able to take this payment holiday. You can take this payment holiday whether you have Coronavirus or not. So don’t feel like I’m not currently suffering with any symptoms or have had it confirmed – that doesn’t matter.
Do I have any other options?
The first thing is that if you have any fixed rate saver accounts, if you have, for example, a 12 month regular saver account where you put a certain amount in every month and then after 12 months they mature, or if you have some fixed rate cash savings and you’re worried about being penalised on interest if you access it early. What a lot of banks and building societies have come out and said is that they will allow you to access that money without any penalties, which I think is great.
So if you do have any regular savings accounts and you’re worried about stopping those payments or accessing that money – if you really need to access it, then don’t worry, because those fees are penalties are being waived during this period.
The second option could be that rather than you taking a mortgage payment holiday, have a conversation with your bank about either extending your mortgage term or changing to interest only.
Many of you will be on what they call repayment mortgages when you pay a proportion of capital and interest. So let’s say your mortgage is £200,000 and your monthly payments are £1000 a month. Of that £1000 a percentage of that pays off interest and a percentage of that £1000 goes off the capital. So if you take a typical 25 year term mortgage, the first 7 to 8 years are interest. You’re purely paying interest off on that mortgage. From about year 7 onwards, everything then goes off the capital balance. So that’s when you start to see that £200,000 reducing.
So one of the options could be that you speak to your mortgage lender and say, ‘Can I change to an interest only mortgage for a period of time’ to help your financial situation. The impact that has is that rather than you having three months of no mortgage payments and not paying anything off your mortgage, it means that you’ll go to interest only, which means your payments will drop significantly, but you’re still paying something off – you’re just paying the interest. What that means is that the lenders then can’t roll up that that interest for you to pay later because you’re just deferring the pain by taking a mortgage payment holiday.
For some people, that’s the right thing to do, but for others it won’t be. Don’t feel like you need to do this because you’re fearful of what could happen, because you have other choices, this is just one option.
Extend your term
Another option is for you to have a conversation with the bank about extending your term. Let’s say you’re original term was 25 years, it was 5 years ago you took your mortgage out, and you’ve got 20 years left – you could speak to your mortgage provider and ask them whether they could extend that mortgage term back to 25 years, for example. What that will do is reduce your payments down, not significantly but enough to give you a bit of flex in times of crisis.
And the third alternative, the third conversation you could have with your mortgage provider is to do what they call a rate switch. So have a conversation with them about what interest rate you’re currently paying and what interest rate is available to you now? Some of you will be on fixed rate mortgages where there’ll be a penalty for you to come out of that product, but certainly have a conversation with your mortgage provider and find out.
Some of you will be on a standard variable rate or something that tracks the Bank of England base rating. With the Bank of England base right now being the lowest it’s been for many, many years, lots of you will actually have seen your mortgage payments going down. So if you’re in a positive financial position right now, and the current situation is not gonna impact your finances too much, what you could actually think about doing is maybe overpaying on the mortgage; so keep your payment the same, even though your payments are going to come down because the Bank of England base rate has come down.
Another thing you could do is redirect that money into a savings account because right now, I would suggest one of the biggest areas that we need to focus on is about flexibility and cash flow. If this does extend for a little longer than we anticipate, then you want to be able to have the ability to just flex and move. Having a little bit more in cash than you would ordinarily need, right now, I think is really important. Right now I think we just need to focus on what we do have, and there’s lots of different options available to you.
Taking a mortgage payment holiday
In the current times of uncertainty, my strong suggestion would be is whoever your mortgage is with right now go onto their website go into their Q&A and there will be some telephone numbers on there for you to access and have some conversations with them.
Just have a conversation with them to see what your options are, put you back into the driver’s seat and put you back into a position of being in control in a time when you potentially feel very, very unsettled.
Really think back to focusing on what you can control rather than focusing on things that you cannot control. If you do have any other questions, please feel free to ask them in the comments.
Book in a complimentary call to discuss how financial coaching can help you move from financial overwhelm to confidence and control.
Covid-19 – What you need to know
Covid-19 NHS advice – Stay Safe