Does taking mortgage breaks effect mortgage applications?

[Tampon]

We are going to put our house on a buy to let mortgage and buy another house due to having difficulties selling it since Brexit. We are moving from Surrey to Dorset and would like to get down there now so are prepared to compromise and get a smaller house for the next 5 years then sell up both and get a nice pad. We have 25% min for the buy to let and around 40% deposit for the new place.

We have a mortgage break clause in our current which means we will be at the end of our 5 year fixed term and won't have a £5k redemption payment to make.

We have the opportunity to have a 6 month mortgage break with our current one. This will allow us to save another £5k before the new house purchase. We have asked our mortgage broker if it would be viewed unfavourably when we apply for new mortgages soon. He says it won't affect anything at all as it is based on what we earn and can afford.

I have read here that it could affect your credit file.
https://www.moneyadviceservice.org.uk/en/articles/...

Are there any knowledgeable folks here who could clarify the situation? Ideally the extra £5k would be useful (but not necessary) to have in the bank but I don't want to effect the mortgage applications in any way what so ever.

Thanks for the advise.

[Ilovejapcrap]

I'd guess yes.

Like not paying your visa everymonth

[Magic919]

I'm sure Sarnie could tell you.

[Tampon]

I thought it would not be a good idea, but the broker was adamant it made no difference.

It didn't effect income or expenditures as we would be saving the money rather than using it to pay for other things so therefore proving we could afford it if needed.

I am worried about either not taking it out of fear and missing out on £5k in my pocket which would help with buying a new place and having a nest egg for the rental as a fallback or doing it and reducing the amount that would be loaned to us just for £5k!

[Sarnie]

Magic919 said:

I'm sure Sarnie could tell you.

I think we/you need to clarify whats actually being offered to you.

- Agreed missed payments
- Payment Holiday

First one is when you are struggling financially and the lender allows you to miss a set amount of payments. Naturally, it still gets reported as arrears and will hugely affect your credit history for six years.

Second one is a facility that some lenders provide where you can choose to take a payment breaks, it will be detailed in your mortgage offer if this is the case. However, from all of the lenders I've seen offering the, the applicant doesn't make a payment for x amount of months BUT that months payment doesn't just disappear (lenders don't just give six months of interest away) as the monthly interest for that month still acrues each month so you may not make a payment for those six months but the balance of your mortgage goes up with each months interest...........so you may personally may be £5k better off but your redemption figure for your mortgage when you need may £4k higher too..............

[Pferdestarke]

If you take a payment holiday then it has no impact on further mortgage applications due to it being authorised. Effectively they're just recalculating your mortgage to include for the additional capital owed and interest payable over your remaining term.

Hth.

[Tampon]

Fantastic, thank you two very much for your advise, very useful. Yes it is payment holiday we are talking about.

So basically I could get the extra money in cash but my mortgage bill I need to settle would go up as well.

Would I come out with any extra cash in my hand in this situation or am I just swapping money here for money there? It is a repayment mortgage I am on. I am thinking I would save the capital repayment part. We are 4 and a half years into a fixed term deal and we pay £785 at 4% at the moment.

Edited by Tampon on Sunday 4th September 22:40

[Pferdestarke]

Tampon said:

Fanstastic, yes it is payment holiday we are talking about.

So basically I could get the extra money in cash but my mortgage bill I need to settle would go up as well.

Would I come out with any extra cash in my hand in this situation or am I just swapping money here for money there? It is a repayment mortgage I am on.I am thinking I would save the capital repayment part.

Example.

Normal mortgage cost £500

1 month holiday, or whatever you agree - you keep your £500. The bank don't collect their standing order.

Your provider adds the capital plus the daily interest not paid on to your remaining term

This means when you recommence your repayments they would go up marginally depending on interest rate and remaining term. e.g. From £500 to £504.31 or whatever

You're robbing Peter to pay Paul but sometimes needs must!

[Tampon]

Thanks for trying to help explain it. I feel I am not fully grasping it though.

I would be ditching this mortgage as soon as May comes around and there is no penalty charge (£4k) to pay then as I can get a much better rate as I have a much higher deposit amount now. This would mean 6 months of no mortgage payments, save the money and then one slighty increased monthy payment then bye bye old 4% mortgage and hello cheaper one.

If I am just saving £5k in the bank and then having to pay off an extra £5k on my mortgage in May when I change mortgage providers then it doesn't make any sense to do so I don't think. If I end up with extra cash going into double house ownership then it might be worth it.

Very confused

[Pferdestarke]

You're confused? Jesus, so are we.

Speak to your bank.

[Audemars]

What are you confused about?

So you essentially want to stop paying your mortgage for the next 6 months so that you can accumulate 6 months worth of money as savings. During that time the interest payments you are not making will be still be added to the amount you owe overall. Your mortgage will not be interest free for those 6 months. Therefore when you resume paying your mortgage in 6 months, the overall amount owed will be larger. Instead of £785 you are currently paying, it might increase to £800 per month for example. What Sarnie is saying is that this extra interest over 25 yrs or whatever your term is will effectively cost a few £k.

Not paying the early redemption fee will usually always be the cheaper option so either go ahead with your plan above or move in 6 months time.

As others have mentioned, if this is a facility provided in your terms and conditions then it will not impact your credit file.

Edited by Audemars on Monday 5th September 07:32

[Du1point8]

Audemars said:

What are you confused about?

So you essentially want to stop paying your mortgage for the next 6 months so that you can accumulate 6 months worth of money as savings. During that time the interest payments you are not making will be still be added to the amount you owe overall. Your mortgage will not be interest free for those 6 months. Therefore when you resume paying your mortgage in 6 months, the overall amount owed will be larger. Instead of £785 you are currently paying, it might increase to £800 per month when you resume paying. What Sarnie is saying is that this extra interest over 25 yrs or whatever your term is will effectively cost a few £k.


As others have mentioned, if this is a facility provided in your terms and conditions then it will not impact your credit file.

Edited by Audemars on Monday 5th September 07:17

Yep this...

So you have a 5% interest only mortgage on £100k over 25 years.
Thats £5k a year you pay or £416 per month not covering the equity.

You decide to take a 6 month mortgage holiday to save £2496
You may think you come back £100k of mortgage, err no... its now £102,496 Plus the interest missed.. So give or take £102,522.00 if my rusty knowledge of the APR added per month is correct.

So now your 5% interest only mortgage is £5126.10 per year or £427.17 per month.
So over 25 years that extra £11.17 per month is actually... costing you £3351 or £900 more than you saved in the mortgage holiday.

[Tampon]

Cheers guys for the help.

I was trying to figure out if I had for the sake of this, a 100k mortgage, didn't pay it for 6 months and saved 5k when I remortgaged in 7 months time would I have £100k debt to pay off (negating the saving 5k totally) or would I have say a £102k mortgage (basically I save the capital payments but I still pay the interest overall.

Feels like I am being too clever and missing the obvious here.

[knk]

It is a payment holiday, but not an interest charged holiday.

[Mikeyjae]

Can you apply for interest only on a fixed term?

[xRIEx]

Tampon said:

Cheers guys for the help.

I was trying to figure out if I had for the sake of this, a 100k mortgage, didn't pay it for 6 months and saved 5k when I remortgaged in 7 months time would I have £100k debt to pay off (negating the saving 5k totally) or would I have say a £102k mortgage (basically I save the capital payments but I still pay the interest overall.

Feels like I am being too clever and missing the obvious here.

The issue boils down to credit (your mortgage) vs savings - if you can get a higher savings interest than the mortgage interest, you would benefit from the payment holiday; if it's the other way around then you would lose out by taking the payment holiday (because your mortgage will accrue more interest over that period than you would earn from the savings).

At 4% you're not going to earn enough interest from a simple savings account.

The general rule of thumb is to pay off any debts before focusing on savings, because of that interest rate difference. Banks make their money by taking people's savings and loaning them to other people - the difference in interest between the two interest rates is the bank's profit. If savings interest was commonly higher than loan interest then banks would go bust - everyone would be better off taking out loans to stick in savings and gain the interest.

This is why flexible (or offset) mortgages are useful - overpay the mortgage whenever you can with whatever money would otherwise go in savings - the interest saved on the mortgage usually outweighs the interest earned on savings. It helps if the mortgage allows you to draw down any overpayments, so you can take that money out again in case of emergency. An offset mortgage is basically two linked accounts anyway, so the 'overpayments' are always available for you to take back.

[xRIEx]

Du1point8 said:

So you have a 5% interest only mortgage on £100k over 25 years.
Thats £5k a year you pay or £416 per month not covering the equity.

You decide to take a 6 month mortgage holiday to save £2496
You may think you come back £100k of mortgage, err no... its now £102,496 Plus the interest missed.. So give or take £102,522.00 if my rusty knowledge of the APR added per month is correct.

Surely you would come back to £100k + missed interest?

By taking a payment holiday he's not coming back to a £97,504 (+ the compound interest), which is where he would have been having not taken a payment holiday.

[Du1point8]

xRIEx said:

Du1point8 said:

So you have a 5% interest only mortgage on £100k over 25 years.
Thats £5k a year you pay or £416 per month not covering the equity.

You decide to take a 6 month mortgage holiday to save £2496
You may think you come back £100k of mortgage, err no... its now £102,496 Plus the interest missed.. So give or take £102,522.00 if my rusty knowledge of the APR added per month is correct.

Surely you would come back to £100k + missed interest?

By taking a payment holiday he's not coming back to a £97,504 (+ the compound interest), which is where he would have been having not taken a payment holiday.

He is... my example was interest only mortgage at 5% APR... so to keep the mortgage at £100k the OP needs to pay £5k a year.

If OP does not pay the interest it still accrues.

A payment holiday makes more sense if you are on a repayment mortgage, so OP might be obliged to pay £900 a month, then taking a payment holiday would cost him £2496 in interest (still accrues), but OP saved £2904 from not paying the repayment side of it and OPs bank would show £5400 from the payment holiday.

That make more sense?

(either that or Im completely off the mark and the banks don't care and don't want their interest every month if you take a mortgage holiday)

[xRIEx]

Du1point8 said:

He is... my example was interest only mortgage at 5% APR... so to keep the mortgage at £100k the OP needs to pay £5k a year.

If OP does not pay the interest it still accrues.

A payment holiday makes more sense if you are on a repayment mortgage, so OP might be obliged to pay £900 a month, then taking a payment holiday would cost him £2496 in interest (still accrues), but OP saved £2904 from not paying the repayment side of it and OPs bank would show £5400 from the payment holiday.

That make more sense?

(either that or Im completely off the mark and the banks don't care and don't want their interest every month if you take a mortgage holiday)

Yeah, my bad, I didn't read the "interest only" bit.