Mortgage payment holiday or Remortgage: which is better for me?
If you are a homeowner struggling with debt, your home could be both a major expense and a valuable asset that could help get you out of trouble.
The Times recently announced that more and more people are seeking ‘mortgage payment holidays’ to keep up with the growing financial pressures of the credit crunch. But what is involved in a mortgage payment holiday, and is it ‘better’ than a remortgage? As always, the answer is ‘It depends on your situation’...
Mortgage Payment Holiday
A mortgage payment holiday is a break (usually no more than a year) from making your regular mortgage payments. It’s a short-term solution designed to free up funds.
Many lenders will not agree to a mortgage payment holiday unless you have been paying your mortgage – reliably – for a certain period of time. Most will also ask for a genuine reason for the mortgage payment holiday, e.g. financial hardship.
Note: If you’ve already made a few ‘overpayments’, you may be able to take a payment holiday without falling behind on your payment schedule.
Why would I take a mortgage payment holiday?
If you’re struggling to meet your financial commitments but can see that temporarily stopping mortgage payments would help you get back in the clear, a mortgage payment holiday may be your best option. Most monthly mortgage payments are significant sums of money, so putting that money towards your other expenses for a few months can make a big difference to your financial situation.
However, be aware that your mortgage will still gather interest on the months you are not making payments, and this will increase the total amount you pay back.
Remortgage
A remortgage involves starting new repayment terms on your mortgage, often with a new lender.
Remortgaging can let you free up some of the value (known as equity) tied up in your home and pay it back as part of your new mortgage. You’ll own equity if you laid down a deposit when you bought the property, if you’ve paid off some of the mortgage, and/or if your property’s value has increased.
This can be an effective way of paying back your debts – so long as your lender is satisfied that you can still afford payments, you could probably take out a new mortgage at up to 80% of your home’s value.
Why would I take out a remortgage?
Many people remortgage to reduce their interest rate – this can save them a small but significant amount every month.
You may also want to reduce monthly payments by extending the time over which the mortgage is repaid. However, you’ll also be paying interest for longer, so you will pay more in the long run.
If you own equity, you can remortgage to finance anything you like, but it could be particularly useful for getting yourself out of debt. A ‘debt consolidation’ remortgage uses your equity to pay off your debts (basically adding your unsecured debt onto your mortgage).
Before you make any final decisions, it’s essential that you discuss your options with an expert debt adviser. They will be able to help you find the debt solution most suited to your situation. If you are faced with particularly serious debt problems, a debt management plan or IVA (Individual Voluntary Arrangement) may be more suitable.