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Should you take a mortgage holiday?
Lenders across the board are offering coronavirus mortgage holidays to those who are facing financial hardship, but is it worth it?
The option of a mortgage holiday is one being considered by many homeowners right now. With the coronavirus pandemic causing the temporary closure of some businesses, the subsequent furloughing of payrolled employees and the loss of income for self-employed workers is making monthly mortgage repayments a challenge for many people around the UK.
Lenders across the board are offering coronavirus mortgage holidays to those who are facing financial hardship, but should you consider applying for one? While they do provide short-term financial relief, mortgage holidays do result in higher payments further down the line, so it’s worth weighing up what will be the best option for you overall.
Our analysis looks at what repayment holidays might mean in the long term for mortgage holders in three different scenarios:
- Scenario 1: First-time buyer, 1 year into their 30-year mortgage of £170,000.
- Scenario 2: Mid-late 30s with a family, with a 20-year mortgage worth £220,000.
- Scenario 3: Older homeowner, with 7 years left to pay their remaining mortgage balance of £55,000.
Table 1: Mortgage scenarios
Taking these three scenarios into account, the table below shows what the monthly repayments and total repayments would be in normal circumstances.
|Scenario||Years left||Mortgage balance||Total payable||Monthly repayment|
|Scenario 1: First-time buyer||29||£170,000.00||£254,739.48||£732.01|
|Scenario 2: Mid-late 30s with family||20||£220,000.00||£292,826.40||£1,220.11|
|Scenario 3: Older homeowner||7||£55,000.00||£61,045.32||£726.73|
Table 2: Taking a mortgage holiday
In response to the coronavirus pandemic, the government has encouraged providers to offer mortgage holidays that last up to 3 months for those who request them. Finder has calculated how much monthly repayments would go up by after a mortgage holiday for each of the three scenarios. The table also shows how much would be paid over the whole lifetime of the mortgage in each case.
For scenario 1, taking a mortgage holiday would cost £1,092 more overall, with monthly repayments going up by £10 from £732 to £742.
It’s a similar picture for scenario 2. Overall, a 3-month mortgage holiday would add £1,208 to their mortgage total, and cause monthly repayments to rise by £20 from £1,220 to £1,240.
The biggest monthly difference would be for scenario 3. While a 3-month mortgage holiday would cost only £237 extra over the remaining life of the mortgage, monthly repayments would rise by £30, from £726 to £756.
|Scenario||Years left||Mortgage balance||Total payable after holiday||Monthly repayment after holiday|
|Scenario 1: First-time buyer||29||£170,000.00||£255,831.30||£741.54|
|Scenario 2: Mid-late 30s with family||20||£220,000.00||£294,034.05||£1,240.65|
|Scenario 3: Older homeowner||7||£55,000.00||£61,282.17||£756.57|
Table 3: An alternative: Extending the length of the mortgage by 2 years
Instead of a mortgage holiday, some lenders will allow the term of a mortgage to be extended. So while you won’t be able to skip any payments like you would with a mortgage holiday, the monthly repayments would be permanently lower for the remainder of the mortgage term. But because the mortgage goes on for longer, the amount repaid in total would be more than if you had not extended the term.
The table below examines the costs of extending the mortgage for 2 years for each of the scenarios in question.
For scenario 1, monthly repayments would decrease to £30 less than the usual monthly payment, but the total cost of the mortgage would be £5,496 more than if they had taken a mortgage holiday.
The differences are even more extreme for a mortgage holder in scenario 2. They would pay £81 less per month than usual but would end up paying £6,760 extra over the new 22-year term than if they had taken a 3-month mortgage holiday.
Those in scenario 3 fare the best with this alternative. With relatively few years left to pay on their mortgage, extending the term by 2 years would see monthly repayments decrease significantly by £145. However, overall this option would still be £1,545 more expensive than taking a mortgage holiday.
|Scenario||Years left||Mortgage balance||Total payable after extending||Monthly repayment after extending|
|Scenario 1: First-time buyer||31||£170,000.00||£261,327.45||£702.49|
|Scenario 2: Mid-late 30s with family||22||£220,000.00||£300,793.75||£1,139.37|
|Scenario 3: Older homeowner||9||£55,000.00||£62,827.03||£581.73|
On 22nd May 2020 the government announced that mortgage holidays could be extended for a further 3 months, meaning those that needed to could take a 6 month mortgage holiday in total. We looked at the impact of a 6 month holiday on monthly repayments and overall cost below.
|Scenario||Years left||Mortgage balance||Total payable after holiday||Monthly repayments after holiday|
|Scenario 1 – First-time buyer (1 year in)||29||£170,000.00||£256,927.50||£751.25|
|Scenario 2 – Early 40's with family||20||£220,000.00||£295,247.16||£1,261.74|
|Scenario 3 – Late 50s looking to end of mortgage||7||£55,000.00||£61,520.16||£788.72|
It’s an extremely difficult time for a lot of people who aren’t getting work or who have lost their jobs. Monthly mortgage payments are one of the biggest outgoings for most people, so taking a payment holiday can seem like an attractive option. It’s a useful route for those who have no other option, however, it will cost you more in the long run, so people who can survive without it should think twice before taking one. Here are some other things to think about when considering taking a mortgage holiday.
Check with your provider:
While our calculations suggest that less than £30 may be added onto your monthly payments after a mortgage holiday, it is worth checking with your provider what the actual cost of taking a mortgage holiday will be, as some cases have seen monthly payments more than doubled.
Consider your circumstances:
If you know you will be struggling with your finances for the foreseeable future, it may be worth extending the term of your mortgage, as this will reduce your monthly repayments and help your cash flow. However, if your issues are only short term, then it may be more sensible to opt for a mortgage holiday as it is a less expensive option overall.
Think about taking other payment holidays:
If possible, it may be worth taking payment holidays that will not accrue interest. For example, most utility providers are being extremely flexible with payment options. Additionally, car finance and short-term loan holidays are not to accrue interest under new FCA regulation, so these may be cheaper options than taking a mortgage holiday.
Consider new ways to bring in money:
Despite lockdown restrictions, there are still ways to make money. It’s worth trying to take advantage of any specific skills or talents you may have, for example, taking up some freelance work using sites like Fiverr or Upwork may be a great way to make the most of your talents. Similarly, with schools being shut, it could be a good opportunity to teach via a tutoring site. Alternatively, some companies will pay you to complete surveys or to participate in online focus groups, or you could drive for a supermarket or a food delivery service while demand is especially high.
After the Bank of England cut interest rates in March, some mortgages are going to end up being cheaper. If you have come to the end of your fixed term, by remortgaging, you may be able to find a deal with a lower interest rate, therefore reducing your monthly repayments.”
- Using typical data for mortgage balances, we calculated monthly repayments and applied the average APRC (annual percentage rate charge) of 3%.
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