The Cost Of Taking A Mortgage Holiday

An image of a hammock on a beach signifying a mortgage holiday

During the COVID-19 pandemic, the government and banks have put several measures in place to try and ease the financial strain and worry that a lot of us are facing – one such scheme being a mortgage holiday. In this article I’m going to be looking at the true cost of taking a break from your monthly repayments, and whether it’s worth it in the long run…

Back in March the news that mortgage breaks would allow homeowners to defer their monthly repayments – without affecting their credit rating – was met with much relief, particularly for those who found themselves unable to work.

Research shows that one in six borrowers are currently taking a break from their mortgage repayments, to the average overall cost of £665.08. The true cost to the individual will depend on the size of your mortgage and your interest rate, as well as how long you have left until it is paid off.

However, despite the fact that a mortgage holiday can afford a lot of families some much-needed breathing space, it’s important to remember that this isn’t free money, and many may not realise the true cost in the long run.

It Could Affect Your Credit Rating

With the 3 month break coming to an end for those first mortgage holiday applicants, it has now been suggested by regulators that those who need to, could be permitted to defer their payments for another 3 months. This would most likely apply to those who are still furloughed, or who are on sick pay or self-employed.

Sounds good in principle, but, it has been suggested that those who need to take this further payment break should have some kind of notice put on their credit rating – even if just temporary. The idea behind this is that it would prevent those who are already struggling with mortgage repayments from taking out other loans, which wouldn’t be in their financial interest.

And How Much Is It Going To Cost You?

The average outstanding loan of borrowers who are looking to take a mortgage holiday is around £136,000, and recent figures show that a 3 month payment break would add an average of £11.21 per month to your repayments once they start up again.

Doesn’t sound too bad does it, just over a tenner a month? That’s doable, right? But over time that debt along with interest will build up to that extra £665.08 I mentioned at the beginning.

And let’s say for argument’s sake that you’re considering taking a further 3 months….well that could add a further £1,331.95 onto the amount you owe.

So, Is It Really Worth It?

Personally, I would say no. If you can continue making your regular mortgage repayments during the pandemic, then do. Even though a mortgage holiday may have been a lifeline for a lot of people who might have otherwise been faced with the possibility of losing their homes, these payment breaks are really just a short term fix, so you should really think carefully if you can perhaps budget elsewhere before you decide to defer your mortgage repayments.

You have to remember that you will still owe that money, and that the interest will continue to build up. Also, in most cases the end date of your mortgage won’t just be extended by 3 or 6 months as you might think, it just means you now have to pay back more money in less time.

My Advice?

If you’ve had no choice but to take advantage of this scheme, my advice would be that restarting your mortgage payments should be a priority as soon as you are financially able to. However, if you are in a position where you can continue to pay your mortgage it will save you money in the long run, and have no adverse effect on your credit score – which can be invaluable in the long term.

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Andy began his career in financial services some 25 years ago and is an integral part of the business through his Whole of Market mortgage advice to clients.

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