A Rough Guide To Mortgage Payment Holidays
For most individuals, their mortgage payment is the largest monthly expense, and when finances are tight it is tempting to look at mortgage payment holidays as a solution. Mortgage Payment holidays cost a lot more than one would think and one should have a good understanding of the costs involved before using them as solution when things get tough.
What Is A Mortgage Payment Holiday?
A mortgage payment holiday are offered by mortgage lenders giving the borrower breathing room when finances become stretched, when they lose their jobs, have unexpected large expenditures or take maternity leave for example.
The lender allows the borrower to temporarily suspend their mortgage payments.
Conceptually this sounds like a good deal, but there are costs involved and borrowers should make every effort to understand the rules. Also before considering payment holidays as an option, one should check with their mortgage provider. Not all lenders offer the option.
Basic Payment Holiday Guidelines
The way payment holidays and the rules associated with them vary considerably from lender to lender, but here are some general rules.
1. Payment holidays are always a temporary measure, and how long a break provided, depends on the lender. Some lenders provide the flexibility of up to a year, and others allow for no more than six months over the life of the mortgage.
2. There is a minimum payment period before a holiday can be applied for, usually of about a year.
3. Some lenders require borrowers to be consistent and up to date with their payments before granting a payment holiday. Others take a more compassionate view and allow borrowers who have fallen into arrears to apply for a payment holidays, though they may be insistent that the maximum payment missed must not exceed one payment.
4. If the loan to value ratio, the proportion of the property’s value taken as mortgage is high lenders may not grant the borrower a payment holiday.
5. Interest still continues to be payable even whilst a mortgage payment holiday is in place. Missed interest payments are added to the value of the outstanding loan, which means that the total amount owed after the mortgage holiday rises, increasing the monthly payment.
An Example Of The Cost Of A Payment Holiday
Assume the original mortgage is for 0,000 with a term of 25 years and an interest rate of 4.5%. The minimum monthly payment on that would be 3 and after the first year of payments, a total of ,996, and the total loan outstanding would be 6,677.
At that point if the individual decides to take a three month payment holiday. For the duration of the holiday, capital payments are suspended, whilst interest payments continue to accrue, increasing the amount of capital owed to the lender. For every month a payment is missed the amount owed increases, increasing the interest amount still further.
The amount of interest payable over the three month holiday amounts to ,656.
After the payment holiday, this additional amount is added to what the individual already owes to the bank taking the balance owed to 8,333 (6,677 + ,656).
This has the effect of increasing the monthly payment by increasing the monthly payment from 3 to 7.
An additional a month may not sound to large, but if that amount is paid over the rest of the term of the loan (23 years and 9 months), the total repayment will be 1,391 (7 x 285 payments plus ,996 already paid)
If the mortgage payment holiday had not been taken however and 3 had been paid consistently over the entire 25 year term, then the total amount paid would be 9,900.
The three month payment holiday has ended up costing ,491
(There is an assumption that interest rates stay the same throughout the 25 year term of the loan)
When Is It Appropriate To Take A Payment Holiday?
Clearly payment holidays are expensive. Sometimes however a payment holiday may make sense if the only option beyond a holiday is falling into arrears. If an individual is worried about making their payments, they should speak to their lender immediately.
The lender may decide that a payment holiday is not appropriate and may offer help in other ways, in the form of reduced payments for example. Individuals should look at alternatives such as the possibility of extending the term of the loan, which would reduce the monthly payment or making interest only payments temporarily. Both methods will increase the total amount of interest paid, but may be cheaper than payment holidays.
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