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.
Independent Partners: Get fee-free expert mortgage advice and find the right mortgage deal for you.
Phoenix Life: Chance of a refund for overcharged policyholders has risen
10 tips for taking out a personal loan
Has your Premium Bond won the £1million jackpot?
There are 'dark corners' of the investment and pensions industry, says Pension Minister
Simon Read: You're guilty until proven innocent when HMRC sends in the tax credit detectives
- 1 Bill Clinton portrait features Monica Lewinsky reference, artist admits
- 2 What happens to your body when you give up sugar?
- 3 Delhi bus rapist blames dead victim for attack because 'girls are responsible for rape'
- 4 Have sex with your iPad thanks to the new sex toy no-one asked for
- 5 Average penis size revealed: Scientists attempt to find what is 'normal' to reassure concerned men
New theory could prove how life began and disprove God
'Jihadi John': CAGE representative storms off Sky News accusing Kay Burley of Islamophobia
This is what it's like to be dead, according to a guy who died for a bit
Durham Free School: 'Creationism taught at' free school facing closure
Ukip would cut billions from Scottish budget to fund English tax cuts
Nearly 100,000 of Britain's poorest children go hungry after parents' benefits are cut
iJobs Money & Business
£15000 - £18000 per annum: Recruitment Genius: This is a great opportunity for...
£50000 - £60000 per annum + Excellent Salary: Austen Lloyd: An outstanding new...
£20000 - £21000 per annum + uncapped commission: SThree: As a graduate you are...
£25000 - £30000 per annum + benefits: Ashdown Group: A global leader operating...
Day In a Page
This six-bedroom Georgian home is on three floors with open fireplaces, a two-oven Aga, an annexe, and cottage gardens with outbuildings and a car barn
High Crest House covers an impressive 9384sq ft, with almost three acres of grounds including a tennis court and summer house enclosed by electric gates
A six-bedroom farmhouse with separate accommodation in converted stables. Situated in the village of Church Aston, within walking distance to the market town
A two-bedroom flat with under-heated walnut floors and bespoke built-in storage. The Tube and Clapham Common are a short stroll away
A refurbished seven-bedroom townhouse with staff quarters, cinema room, superb gym, steam room and plunge pool
A minimnalist four-bedroom home designed to the highest spec, featuring glass walls and a kitchen space lit by a glass roof
Hibernate during winter and make your living during the summer at this busy guesthouse with panoramic sea views, in the village of Lynton
A four-bedroom penthouse next to the Tate with direct views of St Paul's from two floors of luxurious living space
A four-bedroom detached home surrounded by spacious gardens and woodland, close to New Pudsey
An 18th-century, three-bedroom home near Langstone Harbour built from ships beams with vaulted ceilings and wood burning stoves
A five-bedroom semi-detached home with a mix of period and modern features in a popular and convenient location
This five-bedroom red-brick beauty overlooks the village green and sits in just under two acres of land
A three-bedroom villa with self-contained flat, minutes from Lake Windermere
A deceptively spacious, beautifully presented Georgian home with 3000sq ft of living space and five reception rooms
A five-bedroom Victorian home with four receptions, superb gardens and paddock in Pembury
An eight-bedroom house on the south side of the The Green with cinema, wine cellars and summer house
This 17th century beauty is full of rustic cosiness, while the detached home office means you can also run a business
Four exclusive apartments in a Grade II-listed former medical school with 2,275 sq ft of living space and 18ft ceilings
A five-bedroom terraced house on the popular Peterborough Estate, ideally located for both Eel Brook Common and South Park
A state-of-the-art farm-building conversion on the former Cliveden Estate, with 11,420sq ft of internal space, cinema and wine cellar
A three-bedroom, 15th-century cottage with original features in the picturesque village of Sissinghurst
A six-bedroom terraced house with large south-facing roof terrace, cinema room and wine cellar
A new seven-bedroom home built in Queen Anne-style with swimming pool and parkland views in Mortimer
A listed, four-bedroom farmhouse in the rural hamlet of Rushall with detached barn, four acres of gardens and paddocks
A first-floor flat with two bedrooms, a spacious reception room and communal grounds in a leafy part of London
A three-bedroom flat with a spacious rootop terrace and balcony, accessed from a private gated courtyard
A Grade II-listed pile with six bedrooms, stables and 39 acres of grounds in Standlake
A two-bedroom flat with boutique hotel-style interiors, close to the foodie haunt of West End Lane
A two-bedroom flat in a beautiful old vicarage, with many original features, close to the city centre
A three-bedroom 16th-century home with an aga kitchen, private gardens and heated outdoor pool, in Hadleigh
A three-bedrom home in sought-after Queen's Gate Mews, with Italian marble-finished bathrooms
Surrounded by glorious countryside in the village of Udimore, sits this impressive four-kiln oast and barn conversion
A five-bedroom house in the picturesque village of Kettlewell, north Yorkshire
An 18th-century former coaching inn with original staircase, open fireplaces and beams throughout
A Grade II-listed Georgian town house with three bedrooms and a south-facing courtyard, near Arundel Castle
Feel on top of the world at this über chic penthouse on the 37th floor of one of Europe’s tallest blocks.
A Grade II-listed Victorian villa with six bedrooms and two further cottages, all with spectacular sea views
A grade II-listed, Georgian cottage with mature 50ft garden, perfect for summer entertaining
A magnificent Georgian pile with turrets, seven bedrooms, a heated pool and four acres of gardens
Fairoak Farm has five bedroom suites, gym, outdoor swimming pool and golf course
Chic two-bedroom river-fronted flat with a private lift that delivers you directly to your home
A spectacular seven-bedroom Tudor pile, once owned by Henry VIII, with 18 acres of land
A seven-bedroom Georgian property previously used as a picturesque wedding venue
A split-level flat in a church conversion with two en suite bedrooms and 1,200sq ft of living space
A three-bedroom bungalow situated behind an impressive stone wall, £645,000
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads