The Covid-19 pandemic has permeated both our day to day lives and our forward planning. None more so than the effect that the crisis has had on the mortgage market. We have both the perceived and actual threats of individuals being able to continue to fund their monthly mortgages payments, but also on the ability to have funding approved on planned purchases.

To help existing borrowers the Government have announced that mortgage holidays will be allowed.  However, as with most government announcements, the devil is in the detail. Mortgage holidays are nothing new, and have been offered by most lenders for some time. Nevertheless, with the holidays offered at the moment, the monthly payments not paid will be added as a lump sum to the capital owed without any effect of monthly compound interest being added to the amount owed. Therefore, borrowers should be aware that on resumption of normal monthly payments they will owe a greater amount and the payments will rise, albeit not by a great amount.

Our advice is that borrowers should be prudent and consider taking a mortgage holiday, but only if they are experiencing or likely to experience financial hardship. A higher capital amount owed will result in a greater amount of interest being paid over the remaining term of the mortgage.

If borrowers are on a capital and interest mortgage, and suffering cash flow issues, they should consider requesting a temporary move to an interest only mortgage. This would have the effect of reducing the monthly commitment, and at the same time ensuring that the amount of capital owed will not have increased on resumption of normal capital and interest payments.

The correct use of an Equity Release (ER) product

ER products have been advertised widely in the last year or so in both the press and TV advertising. In most cases the advertising has been of a ‘warm and cuddly’ style that allow borrowers to go on holiday, give money to the next generation or to provide a cash nest egg to be used for various uses.

Little emphasis is placed on the punitive long-term effect of borrowing money from what is for most people their most valuable asset. With most ER products, interest is not paid on an ongoing basis, and the loan grows on a compound basis, so we at PWM believe that an equity release product should only be offered in a small number of cases, and where an alternative source of funding cannot be used. That said, when advised correctly, the option of an ER is absolutely the right advice.

We’re here to help

At PWM, we are concerned that those borrowers experiencing a potential issue as a result of the Covid-19 virus will look to either a mortgage holiday, or the taking out of an ER product without fully understanding the costs or the consequences.

Whist one of these two products might well be the answer, there are also other options, and so at PWM we strongly advise borrowers to seek professional independent financial advice before making a final decision. Our mortgage team is here to help and can be contacted on 020 7444 4030 or by email.

Andrew Garber
Partner and Chief Operating Officer
agarber@partnerswealthmanagement.co.uk
020 7444 4041

 

 

The above content does not represent a personal recommendation. Your home is at risk of repossession if you do not maintain mortgage payments.