Homeowners look to take a break from repayments
Increasing numbers of cash-strapped homeowners are taking a holiday from their mortgage payments, despite brokers warning these breaks will cost them more in the long-run.
Several major lenders have reported an increase in the number of customers taking payment breaks. These allow borrowers to put off paying their mortgage from anything up to a year.
Nationwide says it has seen more customers take up this trend over the past few months alone.
Around 85% of borrowers could be eligible to take a break from paying their mortgage, with increasing numbers of deals now offering this option.
But David Hollingworth, from brokerage London & Country, says borrowers should avoid taking payment breaks. "While taking a payment holiday can be useful in giving borrowers breathing space it is certainly not a long-term solution. Borrowers will have to pay for the months they miss, and it will cost them more in the long-term."
If your particular mortgage doesn’t allow you to take a payment holiday, or you are concerned about the long-term cost, then there are other options available.
Hollingworth suggests borrowers looking to reduce their monthly mortgage payments could consider switching to an interest-only deal.
Lower monthly costs
The upside of this is lower monthly costs, which could be ideal if you are experiencing short-term financial difficulties. However, the catch with only paying the interest on a mortgage is that you will not shrink your debt.
So, if your outstanding balance is £75,000 and you pay interest-only for the remainder of your term then you will still owe the full £75,000.
If you are only paying the interest on your mortgage, or are considering doing so in the future, then it is vital that you have a repayment method in mind - especially now house prices have started to fall. It is not enough to assume that your property will increase in value enabling you to be able to repay the loan in full.
Even better, try and aim to start repaying the capital on your mortgage sooner rather than later. This way, you can enjoy lower monthly repayments over a short period of time while you get your finances in order, before switching back to capital repayments.
Another option is extending the term of your mortgage. This means your total repayment requirements will be spread out over a longer period of time, effectively reducing the amount you have to pay on a monthly basis. But remember, this option will increase the total amount you are required to repay as those extra years added to the term will attract interest.
Hollingworth says: "The danger with choosing either of these methods is that borrowers need to have the discipline to get back on track and start repaying the capital - because the longer you leave it, the harder it gets."
If you do want to take a break from your mortgage then it is advisable to speak to a broker about how much this could cost you down the line. You should also check with your lender to see if you are eligible for a break. Some banks only allow borrowers who have had a mortgage for a certain period of time to take a break, while others insist on you having previously made overpayment.
The amount of time you are allowed to take will also vary from lender to lender - while some allow you a year off, others have a maximum holiday period of three months.
And remember, the payments that would have been due during your break will be added to your loan and will attract interest.
Meanwhile, debt charity the Consumer Credit Counselling Service (CCCS) has reported that around 20% of people using its specialist repossession and mortgage arrears service centre simply cannot afford to stay in their homes.
There is a real concern that higher mortgage repayments and falling house prices could leave people homeless, with possession orders and arrears levels already on the rise.
The Council of Mortgage Lenders (CML) has written to chancellor Alistair Darling to outline the steps that mortgage lenders are taking to minimise repossessions.
It says that lenders are informing borrowers on fixed-rate deals soon to expire that their payments will increase and that they should contact them if in difficulty. Borrowers are also provided with information to explain the arrears management process, and set out how they will be treated fairly should the repossession process begin.
The CML has also urged borrowers who think that they may face difficulties in paying their mortgage to make contact with their lender as soon as possible. It says they should continue to pay as much as possible even if they can’t make their full payment, and that they should seek advice to help them prioritise debts and manage their income more effectively.
A homeowner’s worst nightmare; repossession is an action of last resort by mortgage lenders to recover money from borrowers that have failed to keep up with repayments on their mortgage or other loan secured on their home (see secured loan). Repossession is a legal procedure that has to go through several processes before the homeowner is evicted and the property reposed. These are: if a borrower keeps defaulting; the lender applies for a solicitor’s notice; the lender instigates possession proceedings through the court; at the court hearing a possession order is granted and sometimes a possession warrant; a bailiff is appointed and an eviction notice issued at which point the homeowner has two to three weeks to vacate the property.
“Arrears” tend to be associated with debt. If you fall behind and miss payments on any outstanding debt, the amount you failed to pay is an arrear – the amount accrued from the date on which the first missed payment was due.