We are being asked by some of our clients ‘should I take a payment holiday on my mortgage?’.
If you have been furloughed as a result of the Coronavirus, it may be very tempting to apply to your mortgage lender for a 3-month payment break. For some, the break will undoubtedly be a valuable lifeline. Some workers have no Government financial support such as furloughing, perhaps because they are newly self-employed, or they are a limited company business owner.
However, remember that there is no such thing as a free lunch.
Interest will continue to be charged on your loan, which will increase the debt. At the end of the break period, the lender will re-calculate your normal payments – which will now be based on a bigger debt and a shorter remaining term. So, your monthly payments will increase.
Secondly, if you are considering a house move or further advance for home improvements in the near future, consider what effect the payment holiday might have on the lenders view of the affordability of your proposed borrowing. By taking the payment break, what you are actually saying is ‘I can’t manage financially on 80% of my normal income’. This could impact the amount you can borrow.
What about other debts?
This consideration also relates to those with other debts, such as loans and credit cards. If you take payment holidays on those too, your mortgage lender will probably be even less keen to lend you more money later. Whilst taking the payment holidays is perfectly legitimate, it may leave a red flag on your file that even a relatively small reduction in your income could mean your new mortgage becomes unaffordable.
Mortgage lenders may well come through the current crisis with an even more guarded approach to their ‘affordability’ assessments, including how the self-employed are treated and those whose income has been affected by the lockdown.
The advice therefore is to carefully consider whether you do actually need a payment break. Whilst it gives short term financial relief, the down sides can last for a long time. If you are unsure what to do, please talk to us by completing the contact form below.