Covid-19 mortgage holiday: Contractors, should you take the three-month payment break?
Back in March, the chancellor's announcement that homeowners “will not have to pay a penny towards their mortgage while they get back on their feet” certainly got many contractors’ attention.
A three-month payment holiday from your home loan while the country tackles coronavirus could be just what the doctor ordered, writes John Yerou, founder of Freelancer Financials, a mortgage specialist for contractors.
It's just like your lunch
But despite the payment holidays’ soaring popularity, contractors -- regardless of sector and even experience, know that when it comes to chancellors, there’s no such thing as a free lunch.
Incredibly, more than 10 per cent of UK homeowners have now opted to take up Rishi Sunak’s offer of the mortgage payment holiday. Despite this, both umbrella and limited company contractors should understand that, with this chancellor in line with the ones before him, he’s not offering free money.
You / your finances
Only you know how far your finances stretch if you're on reduced or zero income during COVID-19 lockdown. The Department for Work and Pensions will treat applications for government recompense on a per person merit. While most people who work for themselves or run their own business should (eventually) get some form of help, not all will.
The result is, there's never been a time when working statuses have been so diverse:
- Some freelance professionals are still working remotely from home;
- Some ‘on-payroll’ contractors are still working for ‘key services’; and
- Some ‘off-payroll’ contractors at ‘non-essential’ private sector services are on indefinite leave.
In other words, your ability to earn isn't just about your skill level. It's also about your client. Your particular financial situation should be assessed, so you can answer the all-important question:
Should I take the mortgage holiday?
Many lenders are not asking for proof of impacted earnings before granting mortgage holidays. They are doing whatever they can to get those affected out of the loop, so as not to affect their credit ratings. The criteria many lenders are following is along the lines of:
You could be eligible if your income has been affected by the ongoing coronavirus situation – directly or indirectly. (Source: Barclays)
If you are currently behind on your mortgage repayments, you may still be able to get help. Most mainstream lenders are offering special financial advice for those who were struggling even before lockdown.
Many lenders are implementing a fast-track holiday service for those earning nothing, however, and for those who are definitely eligible. Likewise, many home loan providers are basing the impact 'per household', so if you have a joint-mortgage, you should still be eligible.
That said, the ratio of your earnings to household income, if you are the main breadwinner, may play a part.
But do consider the impact of three months' non-payment before deferring repayments.
Repay your mortgage if you can
If there's any chance that you can maintain your mortgage payments, do so! What lenders are offering is neither a giveaway nor free money. You'll still need to repay the capital (or interest only) that you don't pay back during the holiday.
Depending on your circumstances, your lender may offer a variety of repayment options. It may:
- add the lump sum of what you don't pay onto the end of your mortgage;
- spread the lump sum of what you don't pay across the life of your mortgage, resulting in increased monthly payments;
- ask you to pay just the interest or just the capital, rather than nothing at all.
Mainstream lenders now have tables on their websites outlining the impact of the mortgage holiday on mortgage balances. These are theoretical and, depending upon what you owe and your interest rate, may not reflect your individual circumstances.
So talk to your lender about your particular scenario and the impact that your decision will have. But be aware that whichever option you choose, a holiday will cost you more over the lifetime of your mortgage.
Can I remortgage if I'm at the end of my fixed-term?
In theory, a remortgage should be simple enough. But it's not just the spread of COVID-19 that's making lenders hesitant! The world's money markets, which many lenders secure funds on themselves, are both dynamic and fragile. We’re in unchartered waters and lenders have neither experience of this situation, nor a crystal ball.
Most lenders are demanding at least 40% equity in your property before they even consider a remortgage at this time. That is, of course, of the lenders who are actually offering new remortgage deals; some are not entertaining them at all.
One reason lenders are balking is the valuation of your property. If the amount you want to remortgage is similar to your current mortgage, you might be okay. But if there's a fair gap in your property value, you will struggle.
For example, imagine you have a current mortgage balance of £120,000, but your initial mortgage was £140,000. Then, imagine that the property has increased in value since you took that mortgage out by £20,000. That's a potential difference of £45,000, which you'd want reflected in your new deal!
Even if you want to remortgage with the same lender, they would have to send out a valuer to confirm that difference. As mortgages are not a ‘key service,’ valuers and estate agents are all but closed, so it's not going to happen at present.
New mortgage, but on a better rate? Probably not
Having said all that, lenders are trying to assess each case on merit as it comes in. If you're in dire need of a new mortgage, speak to a broker first. Brokers worth their salt are still in constant communication with lenders.
Reaction to COVID-19 is changing daily and there might be more happening with a lender than their website relates. I can't stress enough the benefit of homeowners having someone with their finger on the pulse on their side in these challenging times.
It's also worth pointing out that, although the Bank of England's base rate is 0.1%, don't expect your new mortgage to reflect that rate. Until the global markets stabilise once we come out the other side of this pandemic, you may even see interest rates on mortgages increase.
When contractors should (and shouldn’t) use savings
If you have savings that don't penalise you for withdrawals, potentially consider using them instead of taking the coronavirus mortgage holiday. With the base rate so low, interest on savings is negligible. Plus, many banks have adjusted terms on their ISAs to make it easier to withdraw from them with impunity.
However, if you're relying on savings to pay for day-to-day items, then think twice. Supermarkets are unlikely to give you credit, whereas your lender should be receptive right now.
Still, think about your disposable cash and whether you're likely to need savings to feed you and, if applicable, your family members. With many of us relying on convenience stores rather than large chain supermarkets, weekly shopping bills can become higher than normal.
But if lockdown has reduced your household income and you do not have savings, definitely consider the mortgage break. In the likely event that you don’t go on holiday anywhere else this year, it may be worth it!
Lastly, what NOT to do...
Finally, two things that contractor mortgage-holders should definitely not do:
- Take a mortgage holiday just because you can; if you can afford the payments, carry on making them.
- Cancel your Direct Debit without speaking to your bank first, where it's within your power to talk to your lender.
The last thing anyone wants once the struggle with coronavirus is over is to have a battle with their mortgage lender or for COVID-19 to have a lasting effect on your credit score. Good luck and remember, when in doubt talk it out -- with a specialist.
Editor's Note: Find out more about contractor mortgages here.