Should you take a mortgage holiday?
UK interest rates are at their lowest for 325yrs, and in normal times that’d mean super-cheap mortgages for everyone, yet these aren’t normal times. Lenders have toughened up their acceptance criteria yet again, and millions are on payment holidays. Yet our Money Saving Expert Martin Lewis says, if you're keeping up with payments, then it is time to grab opportunities.
Let’s start with mortgage payment holidays – they’ve been extended haven’t they?
Last week the FCA closed its consultation to extend mortgage payment holidays. We expect it to be rubber stamped within a day or two, and then in place perhaps by the end of the week.
There are two main changes.
Mortgage holders who haven't yet applied for a payment holiday can do so until 31 October.
The deadline to apply for the payment holiday was 20 June, but that’s now been extended to 31 October. This lets those who were holding off applying as they had finances available, a bit more time to decide as to whether they need it or not. The ban on repossessions has been extended until this date too.
Mortgage holders already on a payment holiday should be able to extend it for a further three months.
If you can't start making full or part payments on your mortgage once your initial deferral comes to an end, you can ask to extend your payment holiday. If the lender thinks this would land you in financial difficulty, it will be able to deny the payment holiday and offer other help.
Does this mean everyone should be going for a mortgage holiday?
A mortgage payment holiday allows you to defer or partially defer your mortgage payments for typically three months, so you don’t have to pay your mortgage for that time and any missed payments won’t be recorded on your credit file either. Yet that doesn’t mean there’s no impact.
The interest still accrues during the payment holiday.
This means when you start repaying, as you’ve got to cover that and the missed payments you’ll pay more. For example, if your mortgage payments are £700/mth, and you have 20 years left on the term. You then take a payment holiday, and for six months you pay nothing. Then at the end of it your monthly payment is recalculated to include the missed payments and the interest accrued, over the remaining 19 years and 6 months, so you’d then pay roughly £725/mth.
While it won’t go on your credit file, it can still affect your ability to get credit in future.
This is because, as I revealed three weeks ago, and the regulator then included in its official announcement, lenders can look at other factors such as open banking or your payment history. How much it’ll impact your ability to get future deals we’re yet to see.So, if you’re really struggling with finances and need it, then yes take it, as missed payments without asking for an official payment really will destroy your ability to get a future cheap mortgage. Yet if you don’t need it, don’t do it, or minimise it, as for a partial repayment holiday.
With all this going on should people be looking at cutting the costs of their existing mortgage?
Certainly, mortgage rates are really cheap right now, so it’s worth looking into. The big issue is one of acceptance, if you don’t have much equity in your home (so you’ve a big Loan-To-Value (LTV) ratio) over say 90% it will be tough.
Yet under that deals are very cheap, 2 year fixes from 1.1% if you’ve decent equity and 5 year fixes from 1.35%. To put that in perspective for someone on a typical 4% standard variable rate with a £100,000 mortgage that’s a saving of £1,800/year in repayments, if they switch to 2yr fix at 1.14%.
Like Sam who tweeted "Thanks to @MartinSLewisI try to be financially savvy. I’ve just fixed my mortgage for 5 years, saving £160 per month.Nearly £10,000 saved over the fixed period. Wow."
So what should people do to cut their mortgage costs?
There are three main steps …
1) Ask your existing lender what its best deals are. As you're not switching between lenders, you may not need to pay costly fees - and it can set a benchmark for what to beat.
2) Use a whole of market comparison site to benchmark deals. Use one that includes all deals, including ‘direct only’, those that aren’t offered by a broker. These include Martin’s ‘Mortgage Comparison’ or sites such as MoneyFacts.co.uk.
Make sure you factor in fees too - the smaller your mortgage, the bigger the impact of fees. A good way to compare mortgages is to divide the fee across the discount or fixed period. So, a £1,200 fee on a two-year (ie, 24-month) deal is £50 a month – then add that to the monthly repayment.
3) Use a mortgage broker to finesse which is the best deal. As discussed, the issue here is acceptance, not just about your LTV, but also your credit score and lenders will check if your repayments are affordable. Currently if you’re on furlough, expect them to use that to calculate your income, which could make things tougher to get. And sadly, if you’re in one of the industries which is harder hit, like hospitality or travel, again that can make things tough.
To help match your characteristics to which mortgages are available is something a good mortgage broker can do, which you can’t do yourself. Use a qualified mortgage broker that looks at all deals, and check how much they charge. For face-to-face help ask friends for local broker recommendation or use Unbiased or VouchedFor to find one.
Which should people go for – a fix or variable rate?
The advantage of a fix is you get price and budgeting certainty that the rate won't move for a set time. Whereas variable deals move with the UK interest rate (and sometimes just at the provider's whim). Generally, you pay a little more to fix, but not much. Ask yourself how much you think rates will rise over the period.
If safety is what is important for you – which it is for many right now - err on the side of fixing, and fixing for longer – and right now with fixed deals being outrageously cheap, and there being a lot of uncertainty out there, this is a good time to look at it. And if you can get a long fix for not much more than a short one, that gives you more certainty.