Taking a mortgage holiday is something most of us had not heard of a month ago, let alone contemplated.
Yet the events of the last few weeks and the widespread uncertainty over our jobs and income meant, for many borrowers, these payment breaks have become the only feasible solution to a deeply worrying problem.
But, despite their widespread publicity during the coronavirus crisis, a three-month repayment deferral is not necessarily the best solution for everyone.
The problem is, the loan amount will not change and it must still be repaid. All the ‘break’ means is that the amount you would have paid during the three-month holiday will be added to future repayments.
It’s no wonder there have been murmurs of other options which could help people struck by a loss of income with ways to make mortgage payments a little less onerous.
One of these options, which we have heard being touted, is the interest-only mortgage.
What is an ‘interest-only’ mortgage?
In case you are not familiar, these are – as their name suggests – mortgages where the borrower pays back the interest of the loan only.
This means repayments are cheaper. But, on the downside, you will need to have a plan in place to repay the capital of the loan. What’s more the interest payments can often be more expensive over the longer term.
Over the last decade they have not been the most favoured of mortgage loans. Indeed, the financial crisis in 2008 saw the number of these products reduce significantly because rules around lending became much stricter.
Anyone who wants to take out an interest-only mortgage today must – unlike the pre-crisis days – have documented evidence of how they intend to repay the loan.
But, that said, the number of lenders offering the products has slowly started to creep up. Indeed, Moneyfacts.co.uk data reveals there were 1,656 mortgages with interest-only options in May 2013 and in March 2020 there were 2,256.
Although this number went down in the last couple of weeks due to mortgage lenders pulling products because of concerns over coronavirus, something significant happened on Wednesday.
Indeed one of the UK’s biggest mortgage lenders, Nationwide, re-entered the interest-only market.
This was significant because Nationwide is not only a heavyweight in the mortgage world but has a good reputation amongst its peers.
Jeni Browne, a mortgage and property expert and sales director at Mortgages for Businesses, said: It’s great to see Nationwide come into the interest-only market.
“Nationwide is an incredibly responsible lender and this is reflected in their policy around eligibility for their interest-only criteria.”
In fact Nationwide said its interest-only mortgage would only be available to people with a high level of equity in the property. A sole applicant would need an income of £75,000 (£100,000 for joint applicants) but also have a large portion of equity – at least 40% of the property’s value.
This, explained Browne, would ensure their borrowers would always have a way out of their mortgage.
Is interest-only a good alternative to a mortgage holiday?
Nationwide hinted its interest-only offering could be something which could provide another option for borrowers during the current crisis.
Henry Jordan, the building society’s director of mortgages, said: “During these unprecedented times, it is important to continue offering a variety of options and flexibility to homeowners and, by adding interest-only, we are providing access to our standard product range to applicants with good equity.”
However, Browne warned it should only be an option for those with a repayment strategy.
She said: “As many borrowers consider their finances and how to scale back outgoings at this challenging time, it would be understandable if the idea of interest-only appealed. And yes, it could certainly help with cash flow for now.
“BUT, I would caveat this with a very strong warning that you will still need to repay the debt at some point, so if you are taking interest-only as a short term measure, you will need to be sure to move back to repayment as soon as you are able.”
She added: “I would also point out that interest-only mortgages cost you more over the term, as you pay interest on the full amount for the whole term, rather than on a reducing amount.”
Will more interest-only mortgages become available?
At the moment Nationwide’s interest-only mortgage is only available via mortgage brokers. But experts now think other lenders might follow hot on Nationwide’s heels.
Rachel Springall, finance expert at Moneyfacts.co.uk, said: “During these uncertain times we may well see more interest-only options launch into the market as lenders work out ways to support borrowers looking for a mortgage.”
But she added: “Interest-only can be used as a remedial option, perhaps more so for existing borrowers, so both the lender and borrower can see how the situation changes further down the line.
“These are uncertain times, so borrowers would be wise to seek out independent financial advice to go through their options.”
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I just bought the houses on mortgage and i am also confuse and in huge dilemma what to do. Should i apply for mortgage 3 month holiday or something else. I feel like i bought the house at wrong time.
If you are struggling to pay your mortgage due to loss of income because of the coronavirus you can speak to your lender about a payment holiday or other options.