First things first. There’s no such thing as a “mortgage holiday”. It’s better to use the term “mortgage payment deferral”. According to UK Finance, more than 2 million homeowners and landlords affected by Covid-19 have been granted payment deferrals. This will have provided short term relief to workers who find themselves struggling at this time, but what are the longer term implications of taking a break from your mortgage repayments?
Like most of us, I enjoy a break from work every so often. It’s great to take time to relax, travel or enjoy activities with friends and family. But don’t ask me to make up the time I missed when I go back to work – that would ruin the whole point of taking a holiday!
It’s a different matter with mortgage or rent holidays. If your lender or landlord agrees to reduce or suspend your monthly payments, it’s not ‘free money’. You will still need to pay it back.
So expect an extension to your mortgage term and / or an increase in your payments. If you’re renting, you’ll need to arrange a repayment schedule with your landlord. The short-term relief needs to be weighed up against your longer-term financial wellbeing.
In recent months, some lenders have created easier processes to apply for loan payment deferrals, but don’t automatically assume this is the best solution for you or your landlord. Consider these five points before going ahead.
1. Review your day to day finances
Take some time to sit down and review your income and expenditure in detail. Requesting a reduction in your mortgage or rent payments could be better than a complete halt. This means less of a shortfall to make up later. Many of us have experienced lower social and travel spending in the last few months, so it could be a good time to reflect on any savings made.
2. Check if you’re entitled to assistance
The government has put a range of measures into place during the coronavirus crisis. It’s worth checking whether you might be entitled to assistance. A good source of information can be found here:
3. Use ‘rainy day’ savings
A foundation block of good financial planning is to have an ‘emergency fund’ for unforeseen shocks, and Covid-19 is a text-book example. So if you have cash savings, consider dipping into these before applying for mortgage and loan payment deferrals.
4. Liaise with your landlord
If renting your home, don’t expect your landlord to automatically pass on the short term benefits of a mortgage payment deferral. Remember, your rent covers all manner of other costs like insurances, health and safety compliance, maintenance and agency fees.
Discuss your situation with your landlord or letting agency. Whilst the rent levels agreed in your tenancy agreement remain legally due, government guidance is for landlords to engage in dialogue and co-operation with tenants.
5. Check re-mortgage options
It may be a good time to review your mortgage more fully. If you’re not already tied in to a deal, it’s likely that you’ll save money by switching to a new loan agreement, especially with interest rates being at an all-time low.
A mortgage broker or adviser can help re-arrange your debt to reduce outgoings, or even reduce the term of your mortgage.
In the end, if a payment deferral is the best option for you, the process should be quite straight forward by visiting your lender’s website. But do reflect on these possible alternatives first. A financial adviser or coach can provide further guidance and remember, support is available at no cost from providers like Citizens Advice and The Money Advice Service.