Request a payment deferral

With a financial downturn on the cards, many lenders will be reluctant to repossess a property that they will subsequently be burdened with selling in a falling market. It would be better for them – and for you – to put the mortgage on hold to give your finances a chance to recover. Surprisingly, banks are making this easier to achieve than you might expect and allowing three-month payment holidays on buy-to-let mortgages, as well as those held by owner occupiers.

“We’ll do our best to start your payment holiday or temporarily reduce payments as soon as possible,” says Barclays. “If you submitted your application at least nine working days before your next payment date, and we approve it, we will stop or change your payments to what you can afford from your next payment date.” If your next payment is due before the three-month holiday Barclays is offering would kick in, “you should cancel your Direct Debit by contacting the bank your mortgage payment comes from… We will make sure your credit record is not affected if you don’t pay your next due payment because of the coronavirus situation.”

The near future

The Financial Conduct Authority is continuing to update its guidance on payment holidays in light of the developing situation but, at the time of writing, you should be able to apply for a payment holiday until the end of October and “firms should not commence or continue repossession proceedings against customers before 31 October 2020, given the unprecedented uncertainty and upheaval they face, and Government advice on social distancing and self-isolation.”

This latter point applies even if the lender had instigated proceedings against a borrower before the guidance was published.

Nonetheless, it is important to keep lines of communication open with your lender. If you miss a payment it is going to want some answers, so don’t just go cancelling your direct debit unless you have a valid – and provable – reason. Barclays says it won’t ask you to provide evidence that you are suffering financial difficulty as a result of coronavirus, “but will need to work through your individual circumstances to find the most appropriate way to support you.”

Be aware, too, that a payment deferral can end up costing you more in the long run. While there will be no punitive consequences, your mortgage will continue to accrue interest while it is not being paid off. “This means that your mortgage balance will increase and the amount of interest you pay will increase for the remaining term of your mortgage. Your monthly payment then increases to reflect this after the payment holiday has ended,” explains Santander.

The average UK home loan currently stands at £130,000 which, at an interest rate of 2.5%, will increase by around £270 for every month you don’t make an instalment. At a rate of 4.5%, the total amount that would need to be repaid would climb by around £490, or just shy of £1,500 over the course of a three-month payment holiday.

Overpay if you can… or save

If you have been lucky so far and continued to receive a salary in line with expectations, overpaying a flexible mortgage while you have the resources will cushion the impact of a payment holiday later. By reducing the principal of the loan, the interest you will accrue during the payment holiday will be lower. And, even if you don’t request a pause from the lender, mortgages are less costly the quicker they are paid off. That £130,000 loan will actually cost you £174,000 if paid down over 25 years at a constant 2.5%, with monthly payments of £583. Increasing your monthly repayment by around £250 would reduce the term to just 15 years and save you almost £20,000.

Before taking any course of action, talk to your lender. Depending on its advice, you may do better to put the overpayment in the bank so you can draw from it to make future payments should your circumstances require. Unfortunately, there is no such thing as a high interest account these days, in which case, investing a lump sum in premium bonds, of which you can buy up to £50,000 on a single account may be a viable alternative. You can withdraw your money immediately and, based on prize pay outs, investments earn an average of 1.4% and you have a (slim) chance of winning a significant cash prize, interest free – potentially sufficient to clear your mortgage.