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Finances affected by Coronavirus? Read our guide for information
With more and more people self-isolating, it’s essential that you understand your options in case you’re unable to work and pay your mortgage for a period of time.
If you’re left with unanswered questions after reading this guide, call us on 0330 433 2114 or simply send us an enquiry.
On 17th March 2020, the Chancellor Rishi Sunak announced that mortgage lenders in the UK would offer a payment holiday of up to 3 months to support both residential and buy-to-let mortgage borrowers in light of the Covid-19 outbreak.
Whilst the move has been largely supported by UK lenders, there remains a lack of clarity about what this actually means, how the initiative will be implemented by individual lenders and what impact this might have on the borrowers who do opt to take payment holidays.
Payment holidays aren’t exactly new. In fact, they’ve been a feature offered by a number of mortgage lenders for some time. They allow you – as the borrower - to take a short break of typically 1 - 3 months from your mortgage payments. Lenders will only allow you to take this break if you meet certain criteria.
Under the measures introduced by Rishi Sunak, all lenders will effectively be forced to offer payment holidays, however they'll have discretion on how to treat borrowers who request a payment holiday and the circumstances under which to offer one.
To find out whether a payment holiday is an option for you, you should first check your mortgage offer document to see whether payment holidays are indeed a feature of your mortgage. If they are, you simply need to contact your lender to utilise this feature. If they're not, you'll need to contact your lender and find out how they intend to treat this newly imposed feature. This will undoubtedly vary from lender to lender and, in some cases, your lender may only offer a payment holiday if you’re unable to pay your mortgage in the short term. Whatever their policy, we recommend you ask your lender some questions like these so you can find out about the potential implications you could face - we’ll go into this in more detail below.
It's worth noting that if you're facing financial difficulties as a result of COVID-19 and are granted a payment holiday, your credit rating won't be affected regardless of whether a payment holiday is already a feature of your mortgage.
A payment holiday means that your mortgage payments will stop for a period of time, however it doesn’t mean that interest stops accruing on your mortgage over this period. As you won’t be paying this interest as part of your normal monthly payments, it’ll be added to your mortgage balance which will result in a larger overall debt for you to repay. You’ll also likely have to pay interest on the interest which has been accrued for the remaining term of your mortgage; this can make payment holidays particularly expensive in the long term.
When your payment holiday comes to an end, the lender will recalculate your mortgage payment to take account of your new mortgage balance. Your payments will increase post-holiday because your mortgage balance will have increased due to the fact that interest hasn’t been paid during the holiday period and has instead been added to your mortgage balance. Also, if you have a repayment mortgage – and your mortgage payments are made up of interest and capital payments - no capital will have been paid off during the payment holiday either, which will further increase your mortgage payments up.
There are many reasons why a lender might reject your application for a payment holiday, including:
There are many alternatives to payment holidays that you might want to consider. It’s worth seeking independent advice before you make a decision:
Some mortgages have an underpayment feature which allows you to reduce your monthly mortgage by a set amount. Your proposed monthly payment must cover the interest on your mortgage as a minimum. Underpayments can help if you’re able to make a partial payment on your mortgage but can’t afford the whole thing. They’re more cost-effective than a payment holiday, as you still pay a bit towards your mortgage each month. You’ll need to agree on an underpayment strategy with your lender, regardless of whether it’s already a feature. This option typically won’t affect your credit rating.
In extreme cases, a lender may allow you to switch to an interest-only mortgage part way through your mortgage term. You could also consider remortgaging with a new lender on an interest-only basis, but obviously you must meet their criteria for this to be possible. It’s worth noting that, whilst this might alleviate some financial pressure in the short term, you would need to provide evidence of how you would repay the mortgage balance in the future, otherwise you could find yourself facing a much bigger problem further down the line. It’s important to seek advice on this as it’s a rather big decision with long-lasting ramifications.
Another - often preferable - option is often to reconsider the length of time over which you repay your mortgage. You can sometimes alter your mortgage term with your existing lender or can simply remortgage. It’s more likely you’ll be able to extend your term if you remortgage. Extending your mortgage term can help to significantly reduce your monthly payments. What’s more, most mortgages allow you to make overpayments therefore you could increase your monthly payments when you find yourself in a better financial situation, in order to save interest and lessen the negative effects of having increased your loan term.
Arguably the most obvious option is to remortgage to a lower rate of interest, but many borrowers don’t consider this while they’re still in their fixed rate period. This is often because you’ll face ERCs (early repayment charges) if you remortgage before your introductory rate ends. However, as rates are currently very low, you may find that you’re able to lower your monthly payments and reduce the amount of interest you have to pay by enough that it’s worthwhile.
Communication with your lender is essential right now, as is knowing the right questions to ask them if you’re having issues or are likely to have issues paying your mortgage.
We’ve listed some of the main questions below:
Speak to an independent, qualified mortgage adviser. The initial discussion should be free and they’ll be able to guide you through your options, making a recommendation based on your circumstances and current and future needs.
If you’re up to 6 months away from the end of your current introductory rate, you should already be considering remortgaging. It’s arguably even more important now if you’re concerned about how your income might change in the coming months as remortgaging can help reduce and stabilize your monthly payments.
If you’re delaying your plans to move home and are coming to the end of your current mortgage deal, you may want to remortgage to a new deal with no ERCs.
This could reduce your monthly mortgage payments whilst you decide when and how best to proceed with your home move.
There are a number of mortgages available that can be either redeemed penalty-free at any time or ported to a new property when you do move. The range of penalty-free options include fixed rate mortgages, which would add some security to your situation.
If you want some more information, call us on 0330 433 2114 or simply send us an enquiry.