Borrowers are being urged to start clearing mortgage debt again as more than a million payment holidays come to an end this month.
Around 1.8 million homeowners have taken a three-month payment break since the lifeline was announced in March.
Borrowers have until the end of July to extend current holidays by a further three months, while those who have not yet taken one will be able to apply until October 31.
Lockdown lifeline: Around 1.8 million homeowners have taken a three-month payment break since mortgage holidays were announced in March
But banks have been urging homeowners to resume payments as soon as possible because interest will still be building up.
Here, Money Mail speaks to the experts to see how you can get back on track after a mortgage holiday.
Overpay if you can
A six-month payment holiday on a typical mortgage would increase total repayments by £1,016, according to AJ Bell. This is because interest accrues while payments are paused.
Andrew Montlake, of mortgage broker Coreco, says borrowers should remember breaks were not really holidays but ‘a deferment of interest’.
He adds: ‘If you are able to, the best option would be to simply pay off the amount you deferred over the last three months and continue on as normal.’
Experts say some borrowers may have panicked at the start of lockdown and taken a mortgage holiday they didn’t need. Dominik Lipnicki, of Your Mortgage Decisions, says in this instance it may be a good idea to overpay to reduce the extra interest owed.
He says: ‘Even within a fixed period, most lenders allow up to 10 pc overpayments without a penalty. This is a good option for those that can afford it.’
Holiday over: Banks have been urging homeowners to resume payments as soon as possible because interest will still be building up
Mortgage rates are at record lows so remortgaging or switching lenders may also help to make up for extra interest accrued.
Those who have had a temporary cut in income may find it harder to shop around and meet a new lender’s criteria, but may still be able to switch to a new rate with their existing lender.
Switching from a standard variable rate to a fixed mortgage deal could reduce monthly payments by nearly £200 per month, according to comparethemarket.com.
For those with healthy savings, an offset product could offer benefits and help reduce payments as your savings account balance is ‘offset’ against your borrowing, says Mr Montlake.
For example, if you have a loan of £300,000 and savings of £50,000 you would only pay interest on £250,000.
Extending your mortgage term could reduce the cost of monthly repayments and help avoid the shock of having to restart payments.
For example, extending the term from 15 years to 20 years on a £300,000 loan at 2 pc will reduce monthly payments by around £412 per month.
But borrowers should be aware that the overall interest paid over time will increase.
Switching from a standard variable rate to a fixed mortgage deal could reduce monthly payments by nearly £200 per month
An interest-only mortgage could work for those who have suffered financially in the coronavirus pandemic.
Borrowers pay only the interest charges, not any of the loan. This means payments will be less than on a repayment mortgage, but at the end of the term, homeowners will still owe the original amount borrowed.
The number of borrowers on interest-only mortgages dropped by 8.9 per cent between 2018 and 2019, according to Moneyfacts.
But Rachel Springall, personal finance expert at the data firm, says borrowers struggling to meet their monthly payments might want to switch to the products in the short-term.
She says the proportion of products with an interest-only option has increased from 48 per cent to 61 per cent since March.
Banks will ensure borrowers are able to pay off the loan at the end of the term.
Most major banks and building societies are offering interest-only products subject to their normal eligibility checks.
Mark Harris, chief executive of mortgage broker SPF Private Clients, says interest-only mortgages are best suited to higher earners in receipt of large bonuses who want more flexibility on payments.
He says the products have been returning slowly mainly as an option for those earning more than £75,000, although some lenders have no such restrictions.
He adds that more borrowers could be tempted to opt for interest-only mortgages in the short-term, but warns: ‘The big risk of an interest-only mortgage is that at the end of the term you still owe the capital and have no means of repaying it.
‘One way to avoid this happening is to overpay when you have cash available to do so, reducing the outstanding capital.’
Get A break
Banks should accept that some borrowers have been hit hard by the pandemic and will need to extend their current holidays or take one if they haven’t already.
David Hollingworth, of mortgage broker L&C, says this ‘could give the breathing space that homeowners require as we move out of lockdown and their income begins to normalise’.
Mr Lipnicki says the key is to pick up the phone and talk to the lender to find a solution.
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