What Is The Real Cost Of A Mortgage Holiday?
While there is no denying mortgage holidays have provided confidence and peace of mind to many homeowners, it is crucial to know that mortgage holidays do not represent free money. There is a cost associated with mortgage holidays, and as people start to consider the longer-term impact of COVID-19, the real cost of a mortgage holiday comes to the fore.
According to UK Finance, one in six mortgage holders have arranged a mortgage payment holiday. The cost of a mortgage holiday depends on many factors, including:
- The size of the mortgage
- The interest rate of the mortgage
- The length of time left on the mortgage before it is paid off
A small mortgage payment can quickly add up to a large amount
While each mortgage holder needs to consider their circumstances, Money.co.uk believes that taking a three-month mortgage holiday could increase your overall mortgage payment by £1,331.95. While mortgage holders will likely see a manageable additional payment added to their mortgage each month, over time, this amount can make the cost of buying a home more expensive.
With the mortgage payment holiday option extended to six-months, it is vital people don’t just take the holiday break because they are comfortable with it. As with all major financial decisions, it is crucial people evaluate their options and find an option which is best for their needs.
Salman Haqqi is a Personal Finance expert at money.co.uk, and he said: “Mortgage holidays have proved to be a lifeline for millions of homeowners, who would have otherwise struggled to meet their payments and may have faced losing their homes. However, our findings show that payment holidays should be a short-term fix. It’s important to remember that you will still owe the money and interest will continue to accrue while the deferred payments remain unpaid. And in most cases when a customer takes a three-month payment holiday in a 21-year or 252-month mortgage, the end date of the mortgage doesn’t get automatically extended, so the customer now needs to pay back the mortgage in 249 months.”
Another thing to consider about a mortgage payment holiday is whether it will have an impact on your credit score. Initially, assurances were made that taking a mortgage holiday wouldn’t negatively affect your credit score. However, with mortgage payment holidays being extended, there is a chance that the holiday will be considered in credit scores. There is also the issue as to whether lenders will view holiday payments in a negative light.
Xpress Mortgages director Rachel Lummis says: “I do believe that taking a mortgage payment holiday will have an impact when making an application in the future. I expect the lender will want to know why the borrower took one, what their current situation is and ensure that there are no affordability issues going forward. Questions will most certainly be asked.”
Rachel continued by saying; “We have already seen that some buy-to-let applicants who have taken a payment holiday with a lender and either been in the process or then applied for a new mortgage with the same lender are being told their application cannot continue. The mortgage payment holiday scheme is a lifeline to many and the right thing to do. But others who took a payment break without absolutely needing to may regret doing so further down the line.”
Applying for a mortgage is the last thing many people are considering, but for some individuals and households, now is the right time. Mortgage lenders are still active, so anyone interested in arranging a mortgage, should prepare themselves for the process, and speak with industry experts.