It's winter for credit, so should you take a home-loan holiday?
As lending dries up and bills soar, more borrowers are taking advantage of payment breaks. Sue Hayward asks if this is a solution or a problem postponed
Sunday 27 April 2008
Going on holiday can be the perfect antidote if you're stressed with work worries, and if it's your bank account that's feeling the pressure, you can adopt the same principle and take time out with a "mortgage holiday". But while this sounds convenient, could suspending your mortgage payments temporarily just cause you bigger financial headaches in the future?
More and more mortgage products claim to offer borrowers greater flexibility through the facility for taking payment breaks – in some cases, after you've been a customer for just three months.
Sean Gardner from the financial-comparison site MoneyExpert.com says that 50 per cent of mortgage products offered this option last year – "now it's 58 per cent". But he warns that payment holidays do carry some baggage in that "you're in effect extending your mortgage", as any missed payments are added on to the original loan.
Lenders providing the chance to suspend payments include the Halifax, Lloyds TSB, Intelligent Finance and Nationwide, and this flexibility is proving popular with borrowers, particularly given the credit crunch and the rising cost of living.
Intelligent Finance says the number of applications it has received for payment holidays has more than doubled in the past six months, explaining that one of the main factors is customers looking to pay back credit card debt. Nationwide also reports a rise in applications, particularly over the past eight weeks.
In the current climate, says Mr Gardner, a mortgage holiday can prove the only practical way for some borrowers to get their hands on extra cash, "as anyone with an adverse credit history may experience problems" arranging loans or credit cards.
How much time off you can have varies according to the individual lender. Intelligent Finance allows borrowers to take mortgage breaks only after a year, and then for a month on two separate occasions every calendar year. At the Halifax, you need to have been a customer for three months, at which point you can have six months off.
Nationwide, meanwhile, offers up to a year's holiday. To qualify, says a spokeswoman, you'll need a year's borrowing behind you and your "mortgage must be less than 80 per cent of the value of your home at the end of the payment holiday".
Other lenders, such as HSBC, don't actively promote the mortgage-break option. Spokesman Tim Pie says it will be allowed only if customers have "already overpaid their mortgage by that amount and won't end up in arrears".
GE Money is another lender that doesn't routinely offer holidays. "People don't realise this can prove more expensive in the long run," says spokesman Tom Wilson. "TV adverts talk about taking a mortgage break to go travelling, but people forget they've got to pay this money back plus interest."
It's for this reason that payment breaks should "carry a health warning", according to Cristina Rebollo from financial-comparison site uSwitch.com. She says taking 12 months off from repayments on the average £150,000 loan can be costly, as once interest is added, "you've effectively doubled the cost of those unpaid months if you leave the extra money on your loan long term".
Ms Rebollo adds that there should be measures in place where lenders must routinely provide detailed illustrations showing customers how much a few months off could cost them in the end.
But the Financial Services Authority, the City watchdog, has a different view. "We don't dictate criteria to lenders for allowing mortgage breaks," explains FSA spokesman Adam Richards-Gray.
Another key consideration is when to take a mortgage break. Logically, it will be at a time of change in your lifestyle or career, such as going freelance or starting a family. However, as Ms Rebollo warns: "If you're on a two-year fixed-rate deal and take a one-year break, this eats into a year of your fix." That would mean you've sacrificed a year of a cheap deal, possibly ending up on a much higher rate when it's time to repay the extra money.
Naturally, you must have your lender's permission before you stop making payments, as any unauthorised non-payment goes on record as arrears and can affect your credit rating.
Do so with authorisation, though, and "it won't affect your rating", says James Jones from the Experian credit-reference agency. "When updating records, lenders use special codes for customers taking mortgage breaks," he adds. This shows up on your credit record as if the mortgage were up to date.
Mr Jones says that if customers are really concerned, they should get a copy of their credit report a couple of months into their mortgage holiday to check the details are correct.
'A few thousand more on our mortgage is a small price to pay'
Gemma Bailey, 30, and her husband, Russell Bailey, 29, from Swindon are taking a year's mortgage break from June, which they've planned to coincide with the birth of their first baby.
Gemma will be starting a year's maternity leave from her administration job and says they've made the decision because "we'll be losing my income and for most of that time I'll be on statutory maternity pay, which works out at just over £100 a week".
The couple have a £120,000 loan with Nationwide on their three-bed property and currently pay £700 a month. "The way I see it is that this is going to be an expensive time – buying things for the baby," says Gemma. "So adding a few thousand to our mortgage is a small price to pay for peace of mind for a year and no financial worries."
Although Gemma admits she's not sure how much the mortgage holiday will cost, she and her husband intend to work hard at overpaying on the loan once she returns to full-time employment. "With our current deal, we can overpay by up to £500 a month without incurring penalty fees, so we'll be contributing as much as we can as soon as we can. But I can see us doing this again in the future if we have more children."
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