For many people, a mortgage is their biggest monthly outgoing. It can suck up between 20 and 40 per cent of household disposable income. And that cost has certainly jumped in the past 18 months for those on trackers or variable rates.
Taking a mortgage holiday or payment break means taking a temporary pause from your repayments. It allows borrowers to reschedule their mortgage, smoothing out their outgoings during a period of lower income, by deferring loan interest and capital repayments to the future. This prospect of some breathing space is alluring.
Those who avail of a mortgage break should tread carefully, however. Once your repayments start again, they will be for a higher amount as postponed payments will be added to your mortgage balance while the repayment term stays the same.
Lenders can take a dim view of some payment breaks and this may affect your ability to borrow in future too.
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So why take a break?
A mortgage holiday is designed to relieve pressure for a while, giving you time to fix a blip in your finances. More than 50,000 households had taken a Covid-19 payment break by the end of May 2020, according to Central Bank of Ireland data. That is one in nine owner-occupier mortgages, illustrating the scale of the economic shock caused by the pandemic.
By August 2020, almost half of those payment breaks on residential mortgages had ended with a return to full payments. The initial economic shock to their repayment capacity was temporary, it appeared.
More recently, borrowers on tracker mortgages and those not on a fixed interest rate have experienced a pretty big shock as the European Central Bank embarked on a record run of 10 rate rises over an 18 month period. That has seen monthly mortgage repayments increase by hundreds of euro for some.
Until the ECB drops rates – and a series of quarter point drops are predicted to commence later this year – some of these mortgage holders are dicing with arrears.
Rachel McGovern, the director of financial services at Brokers Ireland, noted that short-term arrears (those less than 90 days behind in their payments) rose 3 per cent in the most recently available Central Bank figures. And she said it generally takes a minimum of 18 months for the impact to emerge, which means things are likely to get worse before they get better even if rates start to fall in June.
Even if your repayment hasn’t increased, things crop up in life. Maybe you’re temporarily between jobs, caring responsibilities mean you’re taking unpaid leave from work or you have unexpected expenses.
Predictable expenses too, like Christmas, a wedding or a blowout holiday can, alongside a mortgage repayment, leave your finances temporarily squeezed.
Whatever your reason, it is important know that a holiday from the mortgage, like all holidays, will bring only temporary relief. And that you will end up paying for it down the line.
Types of mortgage holiday
The type of mortgage holiday you can take will depend on your lender, the type of mortgage you have and your repayment history.
Time-fixed full payment break: Some lenders will allow you to take a payment break for a set amount of time. PTSB customers, for example, can take a complete break from their mortgage or reduce their payments for three months. The three months can be taken consecutively or separately, in any three-year period. You can do this up to three times during the term of your mortgage.
Your mortgage needs to have been with PTSB for at least one year before you first apply for a payment holiday, the loan must be for no more than 90 per cent of the property’s value, you have to have had no more than one month in arrears in the last two years and you must pay your loan by direct debit.
Bank of Ireland also offers a three-month break, three times during the life of the mortgage. Borrowers must be at least two years into a mortgage on their principal private residence and there must be at least 12 months between payment breaks.
You can apply for a break by filling out a form; there’s no need to trouble a broker.
At the end of the break, the interest part of the monthly repayments which you are not paying, including interest on that unpaid interest, will be added to the capital due under the mortgage.
In short, your monthly repayments after the break will be bigger and the amount of interest you pay over the remaining term will be higher too. And you’ll have to repay this bigger overall sum over the remaining term of the loan. That doesn’t get extended.
PTSB gives the example of a customer with a €200,000 mortgage on an interest rate of 3.5 per cent, taking a payment holiday of one month. They would see their total cost of credit over the lifetime of the mortgage increase by €452.50.
And don’t forget, even if you take a holiday from your mortgage, you will still have to pay your insurance costs, such as life assurance and home insurance.
Instead of paying nothing off your mortgage, some lenders allow you to opt for interest only repayments for a period of time.
For example, AIB allows existing owner occupier mortgage customers who are not in financial difficulty to reduce their repayments to interest-only for up to 12 months.
This means you are only required to pay the interest owing on your mortgage for the period. No money will be paid off the capital part of the mortgage, so this will not reduce during the arrangement.
This option will temporarily reduce your monthly outgoings but, again, beware, when the period ends, monthly repayments will be higher to ensure that your mortgage is repaid within its original term.
Interest only: An interest only period is also one of the “alternative payment arrangements” open to you under the Central Bank’s Mortgage Arrears Resolution Process if you have difficulty meeting your mortgage repayments. It’s a short-term fix, only suitable if you think that you will be able to return to full capital and interest repayments in the near future.
If you are under financial distress, that is if your loan is in arrears or is likely to be and a restructure is agreed with you, this restructure is reported to the Central Credit Register where other lenders can see it.
Skipping payments: “Skipping” mortgage payments is a totally different thing. This means making a bigger mortgage repayment most months of the year so that you can pay nothing when things are tight. You’re not actually skipping paying the money by the way, you are still paying it within the year but on a different schedule.
Skipping payments can be a useful tool in helping you to flatten out predictable dips in cash flow. Bank of Ireland allows customers to “skip” two payments a year.
For example, if you’d like to have a bit more disposable income on holiday, when the kids go back to school or at Christmas, you can spread your mortgage repayments in a year over 10 or 11 months and skip the other one or two.
Having no mortgage payment in December is appealing but just be sure you can cope with the higher repayment in the other months. Beware too that having an extra chunk of money in your account at Christmas may lead you to spend more than you otherwise would.
Once you select a skip month repayment option, it will continue each year unless you ask your bank to change it.
Pay ahead: Another approach to taking a holiday from your mortgage is by overpaying it when times are good, and then leaning on this overpayment when things are tighter.
If you have previously overpaid your mortgage and built up “credit”, you can use it to take a payment break during which you underpay your mortgage, usually by the amount built up, says the Competition and Consumer Protection Commission (CCPC).
You can make overpayments, either regularly or as lump sums, when you find yourself with extra cash.
PTSB customers for example, who have previously made regular overpayments and have built up credit on their mortgage can use this credit for a payment holiday. They can also underpay a payment by the amount of credit that has been built up.
Overpayments will reduce your capital balance and you pay less interest. It may even reduce your term. Dipping into your overpayment to take a mortgage holiday however will impact this.
Downsides
But there are downsides to mortgage breaks that you should consider in advance.
Don’t take a mortgage holiday unless you are really stuck, warns Joey Sheahan of mymortgages.ie.
“Even if the break is a feature of the mortgage, if you are seeking credit in future, all banks take a very dim view of people who have availed of it, even if it is by agreement with the bank. I would strongly advise people, unless there is no alternative, do not avail of a mortgage break,” says Sheahan.
He gives the example of a mortgage holder with a repayment of €1,500 a month, or €4,500 over three months. “If they have enough savings to cover a three-month break, I’d urge them to use the savings,” says Sheahan.
“You can understand how a bank might have concerns about a borrower if they don’t have enough of a buffer to cover three to six months.”
If you go the interest-only route, this will be viewed “quite pessimistically”, he says.
If you are in your forever home and don’t plan on ever borrowing again, you might be happy to take your chances knowing you won’t have to deal with a wincing loan manager again. But if you anticipate you will need credit again in the next five years, I wouldn’t,” says Sheahan.
Skipping payments, that is, spreading your 12 mortgage repayments in a year over 11 months and skipping Christmas is not as frowned upon. Overpaying when times are good can also buy you some slack.
“If you can get even one repayment ahead with your mortgage, it just means if there is an issue with a payment not going through on time, you are in credit. That wouldn’t be a bad idea,” he says.
You can contact us at OnTheMoney@irishtimes.com with personal finance questions you would like to see us address. If you missed last week’s newsletter, you can read it here.
