Homeowners have until the end of the month to organise a payment holiday with their lender or face going into arrears.
As part of the special measures announced to help support households financially during lockdown, lenders were told by government to offer mortgage payment holidays to anyone who asked for a break.
The scheme saw credit reference agencies promise not to flag these holidays as a black mark on individuals’ credit files, but this promise expires on 31 October.
It means that homeowners who took advantage of the break now need to restart payments or get in touch with their lender urgently to negotiate an alternative.
Many may not have any other choice but to take measures to reduce their monthly bill. The good news is that lenders have designed a number of options for those in this position.
The financial watchdog has encouraged firms to continue offering support to borrowers
Extending your term lowers your monthly repayments
Some borrowers will be able to extend their mortgage, effectively adding more time to pay the loan off and bringing down monthly repayments.
As an example of how this works, if a borrower extended a £100,000 mortgage at 2 per cent interest from 10 years to 15 they would see their monthly repayments drop by £277 to £643.
This means of course that you will have to continue paying your repayments for a further five years. This would add an extra £5,000 in interest over the life of the mortgage.
Lenders have different criteria for this, with a range of maximum ages they will lend to, so your chances of getting accepted depend on your circumstances.
Get in touch with your lender to see if this is an option for you.
Consider switching to interest-only
Some lenders will let borrowers change their mortgage type temporarily, for example to an interest-only mortgage.
This can drop monthly repayments significantly.
On a £100,000 mortgage at 2 per cent interest taken over 20 years, switching from a normal repayment mortgage to interest-only would see monthly repayments drop from £505 to £167.
The borrower in this case would only be paying off the interest and not the actual loan however, meaning they will still owe their lender the same amount no matter how long they are on interest-only.
This could also result in higher payments once the borrower switches back to a repayment mortgage if the term length stays the same, as they will have less time to pay off the debt.
Extend your payment holiday
Some borrowers may be able to extend their mortgage holiday, or defer the payment of interest on their loan. This will be up to the lenders’ discretion and they may ask to evaluate your finances before proceeding.
If you decide to do this, be aware that this will be recorded on your credit file and is likely to affect your ability to borrow in the future.
Technically, payment holidays are arrears – in other words, you have defaulted on your payments and this counts against you when you apply for a mortgage, loan, credit card or other form of finance.
Contact your lender
The very worst thing you can do if you’re under financial pressure is to bury your head in the sand.
The government has told lenders they need to be lenient with borrowers who are struggling because of the coronavirus pandemic and its impact on their finances.
Not all lenders will be offering all borrowers these options so it’s imperative that you speak to your bank or building society to find out which one you might be able to take.
Taking a mortgage holiday from next month may adversely affect your credit score
Not taken a mortgage holiday but still worried about your bill?
If you haven’t taken a mortgage holiday but are still looking to lower your monthly bill you could consider remortgaging.
Rates have come down in recent years and though they are creeping up at the moment, they’re still low for those with more equity in their home.
You can also find all the best deals for yourself using This is Money partner L&C’s free search tool.
If you have only been in your home for a few years, it may be difficult to find a good deal however – lenders have pulled low deposit mortgages for the timebeing and deals may remain scarce for some time.
Mortgage holidays always cost you more in the long run
Banks will rake in hundreds of millions of pounds in extra interest off the back of the payment holidays already granted, especially from those borrowers who opted for a six month rather than a three month holiday.
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 2.24 per cent, then after your mortgage holiday your monthly payments will go up from £505 to £515, and you’ll pay an additional £955 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 £1,945.
This is more than double the three month holiday, because the interest on the loan compounds while you’re not paying it.
If you want to see how much a mortgage holiday may have cost you, broker Habito has a mortgage holiday calculator which you can find here.