The breaks are seen as a lifeline for borrowers facing financial ruin due to the coronavirus crisis and 1.24 million have been approved, according to UK Finance
Campaigners say the vast profit lenders will make from the crisis is ‘disgraceful’ and are demanding they scrap additional interest charges.
The breaks are seen as a lifeline for borrowers facing financial ruin due to the coronavirus crisis and 1.24 million have been approved, according to UK Finance. But most homeowners will end up facing heftier interest payments as a result — around £500 on a typical mortgage.
That is despite banks being able to borrow at record low rates and the billions of taxpayer cash that was used to bail them out in the last financial crisis.
Baroness Altmann, former pensions minister, says: It’s an outrage that people are being led to believe that banks are somehow being kind to them when actually what they’re doing is making more money from them. What we need is an interest holiday that doesn’t rack up extra costs in the long run and actually gives something back.
Homeowners can ask their bank to freeze their mortgage payments for three months, but face paying out more overall because interest accrues.
When the break ends, borrowers can choose to pay back the interest or add it to their loan balance. The latter option will cause monthly repayments to rise for the rest of the term.
On an average £132,128 mortgage at 2.37 per cent over 17 years, the total repayment is £160,656. A three-month mortgage holiday will push the total up to £161,164, an increase of £508, says AJ Bell.
Yesterday, UK Finance confirmed 1.24 million mortgage holidays have already been approved by lenders, meaning one in nine mortgages in the UK is now subject to a payment holiday.
It means lenders currently stand to make at least £630 million in extra interest, but given the number of approvals more than tripled in the two weeks between March 25 and April 8, with around 61,000 being granted each day, that total is likely to rise further.
The majority of approved holidays are thought to be for the full three months.
The Financial Conduct Authority (FCA) has encouraged banks to be flexible when offering mortgage holidays and has said lenders can reduce or waive extra interest charges for those in need.
But banks face pressure to do more to help those affected by the pandemic after receiving billions in taxpayer cash during the financial crisis in 2008.
Dominik Lipnicki, of Your Mortgage Decisions, says: It’s disgraceful that banks would want to profit from the pandemic. People will remember how we all had to suffer as a result of having to bail them out. It’s only fair that they do something for the public when we need them.
We are talking to clients all the time who have lost their income and this is a real lifeline, but to saddle them with more interest at the end of all this is not in the spirit of the payment holiday. Normally interest is paid back later and that’s fine because it’s a client choice, but right now it is not a choice. This is a real kick in the teeth for borrowers, he said.
The FCA has already said it expects banks to introduce £500 interest-free overdrafts and credit payment breaks for three months.
Laura Suter, personal finance analyst at AJ Bell, says that while banks could waive the additional interest on mortgage holidays in the same way they have done on overdrafts, the size of mortgage borrowing means it would be a larger sum to waive.
She warns borrowers not to ‘rush into taking a mortgage holiday without working out the real cost’.
Struggling homeowners could extend the term of their mortgage, which would reduce monthly repayments.
Other options include switching to an interest-only loan, which would cut your monthly costs but help you to keep on top of interest repayments.
Sarah Coles, of Hargreaves Lansdown, says banks could be reluctant to waive extra interest on mortgage holidays because they are having to borrow to finance the breaks.
She adds that homeowners can avoid paying back more on mortgage holidays by switching to cheaper rates.
Mark Harris, chief executive of mortgage broker SPF Private Clients, says: Lenders should be applauded for enacting government policy within a relatively short period of time, particularly as it has been a big draw on their resources.
UK Finance chief executive Stephen Jones says: Mortgage lenders have been working tirelessly to help homeowners get through this challenging period. The industry has pulled out all the stops in recent weeks to give an unprecedented number of customers a payment holiday, and we stand ready to help more over the coming months.
A spokesman adds: Customers will continue to be charged interest during the payment holiday unless their lender has told them otherwise.
Before their payment holiday period comes to an end, customers will be given information on the cost of the deferred payments and interest accrued, which will then typically be spread across the remaining term of their mortgage. Lenders will also offer alternative arrangements for customers where necessary to ensure repayments are affordable, including tailored support for any borrowers in arrears, the spokesman added.
An FCA spokesman says its guidance on mortgage holidays ‘does not prevent firms from providing more favourable forms of assistance to the customer, such as reducing or waiving interest, depending on the circumstances’.
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