This may provide a quick fix for these consumers, but with banking experts predicting further house price falls of up
to 15% in 2009, this will bring the average house price down from £158,442 to £134,675. For consumers that have anything less than 25% equity in their property, the costs incurred from the payment holiday coupled with falling property prices could push them into negative equity.
Historically, this facility has been used by consumers embarking on a life-changing project such as a wedding, a new baby or an extended overseas trip.
Unfortunately, today’s financial climate is pushing three million more consumers down this road just to keep up with the cost of living (1,046,034) or to cover holiday costs (602,262). However, 1.4 million consumers think that the interest is frozen during this holiday and 6% think it’s completely free so it’s unlikely these people will fully understand the long-term financial implications of this decision.
Every mortgage customer has to “apply” for a payment holiday and most providers stipulate that the applicant must have successfully paid the mortgage for a specific period of time.
With some flexible mortgage customers already being asked to make a lump sum payment to their provider as the value of their property value has dropped below 90% of the mortgage amount, people could find themselves in hot water if they don’t fully understand the financial implications of a payment holiday.
Already, 7% (821,800) of mortgage holders have taken a payment holiday and 2% are in the process of applying. With the average holiday at around four months, these consumers have already seen their monthly repayments increase by £26 and their overall mortgage go up by £3,436.
Collectively, these consumers will be paying £21million more on their monthly repayments and their total interest will have gone up by £2.8billion.
Louise Bond, personal finance manager, uSwitch.com said: “Mortgage payment holidays are a great facility for consumers that are looking to take a short break in order to get married, have a baby or generally chase their dreams. However, in this climate the facility should not be used by people that have been struggling to pay their mortgage or keep up with general living expenses for a long period of time.
“A holiday will not make the underlying financial issues disappear. In fact, both the repayments and the debt will actually go up after the holiday and, if anything, it could actually make the problem worse. These holidays are simply an agreed
deferment but it is by no means a ‘freebie’ and the interest and the repayments still have to be made at some point.
“Just last month, two leading mortgage providers, Nationwide and Halifax, did the right thing and reviewed their policies on payment holidays. Halifax no longer offers this facility to those who have been made redundant and Nationwide is considering a new rule that will only allow consumers with at least 25% equity in their property to take a break. This is something every
mortgage provider should now be addressing to ensure people do not end up in a worse financial situation after the holiday. With house prices expected to fall further in the next 12 months, this could push homeowners over the edge into negative equity making it really difficult to remortgage.”
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