Payment holidays can be anything but a welcome break
The offer of missing a few instalments on a mortgage sounds generous, but it can also include some nasty surprises. Sarah Davidson reports
Sunday 02 September 2012
Holidays are meant to be relaxing. Switch off the mobile phone, abandon the to-do list and lie back with a trashy novel on the beach. Surely it's not unreasonable to expect a feature on your mortgage calling itself a "payment holiday" to offer the same stress-free break?
Think again. With so many Britons feeling the pinch of higher prices and static salaries, mortgage advisers warn offers of a payment break are full of hidden nasties. Even if you've built up a cushion of overpayments you may find yourself being refused a mortgage holiday and labelled a late payer.
Last month, Tesco Bank launched its first mortgage offering customers the opportunity to repay 20 per cent of the loan amount off each year without penalty. The deal also advertised the added benefit of a payment holiday allowing the customer to miss a single monthly payment up to twice a year and six times during the term of the loan.
It looks like a nice feature – offering you the chance to overpay penalty-free in the good times and skip paying your mortgage to help manage the cost of Christmas, say, or to tide you through the first few months after having a baby.
A spokesman from Tesco Bank says they included the option because of the "flexibility" it gives customers. "Life isn't always predictable and this can remove pressure from customers at particular times in their lives," he adds.
But Ray Boulger of mortgage adviser John Charcol is warning that this "flexibility" may actually step up the pressure on your finances and turn your mortgage mini-break into the holiday from hell.
"Most people don't want a payment break unless they've suffered something like a temporary redundancy or a relationship breakdown – and that means they're much more likely to fail any underwriting and be turned away," says Mr Boulger.
Tesco Bank admits that it does underwrite the borrower when they apply for a holiday – risking just the scenario Mr Boulger highlights – and it's not alone. Nearly every lender has some "criteria" it expects borrowers to fulfil before they grant a payment holiday. In almost every case lenders reserve the right to check your employment status, income level, whether you've missed any other bill payments and to request a new valuation of your property before allowing the holiday. Failure to pass any of these tests will result in the door being slammed in your face.
"The trouble with payment holidays is the benefit looks attractive but the whole issue is a minefield and borrowers shouldn't allow themselves to be reliant on their lender allowing and agreeing one," warns Colin Payne, a director at mortgage adviser Chapelgate Associates.
"Lenders' policies mean that they can pretty much find a way to decline it should they want to – there are no guarantees. Circumstances quickly change as do lenders' own criteria and I would be wary of trusting any lender that would indicate it wouldn't be a problem at the outset."
The option of a temporary payment break can be good for borrowers facing maternity, divorce, bereavement, illness or having to act as a carer, but the grey area is for those who've seen a change in employment. Even temporary redundancy will set the alarm bells ringing for lenders.
Each lender has their own policy and most claim they don't treat holidays as failure to meet repayments but advisers say many payment holidays are phoney and risk damaging your credit record.
Dean Mason, a financial adviser based in Hertfordshire, says he's experienced first-hand how difficult lenders can be.
"I had a client who applied for a payment holiday with Bank of Scotland because he was changing his business and cash flow was tight. Unfortunately, he told the bank he was having difficulty paying the mortgage which he wasn't at that stage – he was trying to pre-empt that happening. It turned down his request saying 'financial difficulties' was not a reason to get a payment holiday and put him through to the collections team even though he wasn't in arrears," says Mr Mason.
Several lenders won't consider payment holidays at all because they assume people only need one if they can't pay.
"Most of the time customers who want a payment holiday are struggling with their finances so a break wouldn't necessarily be the best solution – a bit like putting a plaster on the problem rather than solving it," says a spokeswoman from HSBC, one bank that doesn't consider payment holidays.
The number of lenders offering payment holidays is small. Tesco, Halifax, Lloyds, Northern Rock, Virgin Money, the Co-operative and ING Direct all offer payment breaks as a formal feature on some of their mortgages as do various building societies including Leeds, Coventry, Market Harborough, Cambridge and Norwich & Peterborough.
But several of these lenders will only consider it if you've made overpayments on your mortgage before you apply. In effect the overpayment acts as your usual monthly repayment during the "holiday" month. And in some cases even that doesn't cut it. If your lender has reassessed your mortgage since the overpayment, your outstanding balance is reduced and subsequent monthly payments come down.
Mr Boulger suggests borrowers who want the flexibility of being able to overpay their mortgage and then underpay if they need to should think about an offset mortgage rather than relying on a payment holiday.
"Offsets are the crème de la crème of flexible mortgages," he says. "If you're paying your monthly mortgage out of the linked current or savings account that money is still yours and you can access it whenever you like without the lender demanding to re-underwrite you. As long as you have cash in that account you're effectively paying the mortgage every month – you might just be reducing the offset balance."
Royal Bank of Scotland, NatWest, HSBC, Santander and Woolwich for Barclays all offer this flexibility through their offset deals, but the more flexibility you want in your mortgage the greater premium you'll pay on rate. A typical flexible mortgage allowing for overpayments, underpayments, a reserve facility and payment holidays is likely to cost around 1 per cent more than a product without these benefits.
The alternative is to opt for a cheaper mortgage rate and save towards an emergency fund. A mortgage of £150,000 at a cheap rate of 2.99 per cent would be approximately £710 a month whereas the flexible deal at 3.99 per cent would be around £790 allowing you to save the difference of £960 over a year.
It would take 18 months to build up a two-month equivalent payment holiday and after a three-year period you have four months saved – better than most lenders' payment holiday periods will allow.
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