Following Boris Johnson’s announcement regarding three-month mortgage payment holidays, lenders have been inundated with enquiries from concerned borrowers.
But is a mortgage payment holiday the best solution during the current crisis?
On the face of it, a mortgage payment holiday might sound like a great idea… three months to forget about your biggest monthly outgoing – what’s not to like. But it simply isn’t as straightforward as this. There are several misconceptions and potentially serious repercussions that need to be given thorough consideration before going ahead.
Misconception – I’ll save money
The first important point to be aware of is that a payment holiday is a deferment of 3 months. It is not a saving.
You will be liable to catch up on the arrears, along with any interest charged. Furthermore, mortgage lenders haven’t yet provided a firm policy on the time they will give you to make good on your arrears. You may find yourself having to catch up on arrears over a short period of time. This could put you under significant financial stress.
Misconception – If I’m struggling with repayments, I can transfer (switch) to a cheaper product with my existing provider
Mortgage lenders have confirmed if an individual is in arrears, even on an agreed holiday, they may not be allowed to product transfer. If remortgages become difficult to obtain and you’re behind on your mortgage payments, you could become trapped on your existing lender’s standard variable rate. SVR – usually ranges from 2-5% above the base rate, further exasperating the situation.
Consideration – True income
Thankfully the Government stepped in very quickly to guarantee 80% of an employee’s income. If you’re employed, this will have a significant impact on protecting your finances.
To put this into perspective, even if you were to lose 20% of your monthly gross income, after allowing for tax, NI and pension contributions, at the maximum covered salary of £2500 per month, your monthly earnings would theoretically be reduced by £310. But, just think how much you will be saving by not going out for dinner, taking you morning coffee, travel etc. On balance, most of us won’t be significantly worse off if we’re sensible with our finances. Therefore, we should be able to meet our mortgage payments, without sacrificing the essentials.
Consideration – Payday Loans – Avoid at All Costs!
Having considered potential income, we cannot stress the importance of avoiding short-term lending solutions i.e. payday loans…at all costs.
Such borrowing may be tempting to cover your short-term needs. However, the long-term damage to your credit file can be enormous. A payday loan will prevent you from obtaining finance for at least 12 months – it is absolutely not easy money!
Consideration – Burning your bridges with your mortgage lender prematurely
The Covid-19 crisis has and is evolving rapidly – we’re in truly unprecedented times. Despite numerous predictions from experts, nobody knows what will happen over the coming months and even years. So, wherever possible, please avoid exhausting the goodwill of your lender straight away. Only ask for a payment holiday if you absolutely need it. If the situation persists beyond the Summer, you may need the option later.
Consideration – Things are really tight and I need to reduce my outgoings quickly
As we’ve already mentioned, payday loans are not the answer. There are other options available that won’t have such detrimental ramifications on your ability to obtain future credit. Two such options are a remortgage or product transfer (provided you haven’t taken a mortgage holiday). If you urgently need funds to tide you over, debt consolidation using a second charge mortgage, or equity release may provide a suitable option.
Consideration – Protecting yourself and your family in the future
The Covid-19 pandemic has made all of us consider our own mortality and financial stability, more so than ever before. Thankfully the Government has stepped in to help us. But what if this wasn’t the case, or what if the unthinkable happened again. Would you be able to survive off just £94 Statutory Sick Pay (SPP) each week?
Misconception – life insurance and critical illness cover are out of my budget
A future pandemic could change how many countries and workplaces operate. We are fortunate to have an unbelievable level of Government support this time. However, we don’t know what the future will hold, especially if people decide not to insure themselves against unknown risks. Protecting your health and finances isn’t as expensive as you might think. For example, a 30-year-old non-smoker could get £250,000 life cover over 25 years for under £10pm (based on standard terms).
During this very difficult time, we want to do everything we can to help you. If you need advice on your current mortgage, want to consider a product transfer, remortgage or insurance, please don’t hesitate to contact us: 01702 533 400 or email info@ingard.co.uk.
