A mortgage often accounts for a substantial proportion of a person’s monthly spend, consuming around 20 to 40 per cent of their spendable income. This particular expenditure has seen a noticeable rise within the last year and a half, especially for those with tracker or variable rate mortgages.
Opting for a mortgage holiday, or a repayment break, introduces a short-term hiatus in repayments, providing borrowers the ability to reschedule their mortgage in order to manage their expenses more smoothly during financially challenging times. This strategy involves deferring the repayments of loan interest and principal to a later date, thus providing a desirable respite.
However, such a decision requires caution. Once the break concludes, the resumption of repayments will entail larger amounts, as the deferred payments are included in your outstanding mortgage balance while the tenure remains unchanged. Additionally, such repayment breaks can sometimes be viewed unfavourably by lenders, potentially impeding your capacity to secure future loans.
So, why choose a repayment break?
Mortgage holidays offer temporary respite, offering time to readjust financial irregularities. As of May 2020, Central Bank of Ireland data indicated that over 50,000 households, or one in nine owner-occupied mortgages, had opted for a Covid-19 repayment break, reflecting the economic turbulence caused by the global health crisis.
By August 2020, almost half of the said breaks had ended, with borrowers returning to full repayments, suggesting that the initial economic disruption had only been temporary.
More recently, those on tracker mortgages or not on a fixed rate have been severely impacted as the European Central Bank undertook an unprecedented course of elevating rates 10 times within an 18-month timeframe. For some, this led to a significant increase in their monthly repayments.
Until the ECB reduces rates – which anticipate a series of reductions later this year – some mortgage holders are at risk of falling into arrears.
Stripe analyst, Rachel McGovern, notes that short-term arrears, those behind in payments by less than 90 days, escalated by 3 per cent according to the latest Central Bank figures. She anticipates that it may take at least 18 months for the full impact to emerge, implying that circumstances may worsen further before any improvement can be seen, even with rates predicted to decline from June onwards.
Life can bring about unforeseen situations. Perhaps you’re taking a career hiatus, dealing with familial care obligations or facing unexpected outgoings. You could also be looking at managing regular large-scale expenses like festive seasons, wedding celebrations or extravagant vacations. All of these situations paired with your mortgage repayments can put a temporary strain on your financial bandwidth.
Remember, opting for a mortgage holiday is also a temporary resolution and you’ll find yourself having to pay it off later.
Let’s talk about different mortgage holidays. The options available to you would depend on your mortgage, your lender, and your payment history.
Time-fixed full payment breaks are enabled by a few lenders. That is, for a certain period, you can either entirely halt your mortgage payments or lessen them. As an instance, if you’re a PTSB customer, this breather could last for three months – either taken in one go or divided, spread over a three-year timeframe. You could opt for this no more than thrice during the tenure of your mortgage.
However, there are prerequisites. You’d have been a PTSB mortgage-holder for no less than a year prior to requesting for this break. The mortgage would be no more than 90% of your property’s value. Only once may you have defaulted on your payment in the past two years. And your payment method would have to be by direct debit.
Bank of Ireland provides a similar threescore too, but with a minimum of a two-year engagement with the mortgage on your primary private residence and with at least a one-year span between each break.
You don’t need a broker’s intervention to apply; simply fill and submit a form.
At the end of your payment break, the unpaid aspect of your monthly repayments, including interest and interest on said interest, will be accumulated into your outstanding mortgage capital.
In essence, your monthly payments, post-break, would be relatively large. Consequently, the interest amount paid during the remainder of the tenure would increase too. This lumped amount will be disbursed during the rest of the loan life, which will remain unchanged.
PTSB illustrates with an example where a client who possesses a mortgage worth €200,000 and an interest rate of 3.5% decides to take a month-long payment break. The total expenditure over the entire lifespan of their mortgage would witness an increase of €452.50. Do bear in mind, a mortgage break doesn’t nullify other costs such as insurance payments like life cover and house insurance.
Certain mortgage lenders have provisions to allow you to pay only the interest for a given duration, instead of not remitting anything. For instance, AIB allows clients who are homeowners with a mortgage, and not encountering financial woes, to temporarily switch to interest-only repayments for a maximum of one year. This implies that throughout this period, you are obliged to meet the payment of the interest accumulated, without paying off any part of the mortgage principle, which therefore, won’t decrease during this arrangement. Doing this will result in lower monthly spending initially but be wary, once the period concludes, the monthly payments will spike, to make sure the mortgage is fully paid within the set term.
The Central Bank’s Mortgage Arrears Resolution Process introduces an ‘interest-only’ period as an ‘alternative payment arrangement’ for those finding mortgage repayments overwhelming. It can be considered a quick-fix solution, only suitable if you anticipate being able to resume complete capital and interest repayments in the near future.
In case you find yourself in financial distress, that is, if your loan is overdue or it’s probable and you’ve agreed to a restructure, this plan will be reported to the Central Credit Register where it will be visible to other lenders.
The concept of ‘skipping’ mortgage payments is quite different and involves making larger payments for most months so that you can avoid making payments when funds are scarce. This doesn’t necessarily mean you are completely bypassing the payment; you are simply shifting it within the year to a different timetable. This practice can considerably help in smoothing out anticipated shortfalls in cash flow. Such an option of ‘skipping’ two payments annually is offered by the Bank of Ireland to its clients.
For instance, if you desire more available funds during holidays, such as school breaks or Christmas, you could decide to distribute your annual mortgage payments over 10 or 11 months, skipping one or two. The prospect of not having a mortgage payment in December might be attractive, however, it’s important to ensure you can handle the elevated repayments in other months. Also, keep in mind that possessing additional funds during Christmas could tempt you to overspend.
Once you choose the option of skipping a month for repayment, it will persist every year unless you request your bank to alter it.
Another alternative to having a mortgage break is by overpaying when finances are robust, and then utilising those overpayments when finances are constrained. The Competition and Consumer Protection Commission suggests that if you have overpaid your mortgage in the past and accrued a “credit”, it can be used to have a payment break during which you pay less towards your mortgage to the extent of the credit that has been accumulated. Overpayments can be made, either regularly or as a single lump sum, when you discover you have spare cash.
PTSB customers, for instance, who have routinely overpaid and amassed credit on their mortgage have the option to utilise this credit for a payment holiday. They can also lower a payment by the sum of credit that has accumulated. Although overpayments diminish your principal balance and you pay less interest, even potentially reducing your term, using your overpayment for a mortgage break may affect this.
Nevertheless, consider the potential disadvantages of mortgage breaks beforehand. A mortgage break should not be taken unless you are genuinely in a financial bind, warns Joey Sheahan from mymortgages.ie.
Even the facility of a break is a component of the mortgage, future credit seekers should be aware that banks do not look favourably at those who have taken advantage of it, even with the bank’s consent. Sheahan strongly recommends that unless there is no other option, desist from a mortgage break. He cites an example of a mortgage holder paying €1,500 monthly, a total of €4,500 over three months, he encourages them to utilise their savings if they have enough to cover a three-month break.
A bank may be concerned about a client’s ability to repay a loan if they lack sufficient savings to cover expenses for three to six months. Opting for an interest-only approach may be negatively perceived, according to financial professional, Mr. Sheahan. If you are situated in your permanent residence and have no intention to borrow in the future, you could take the risk without the need to negotiate again with a loan manager. However, Mr. Sheahan advises against it if you foresee needing to borrow again within half a decade.
Spacing out your annual mortgage repayments over 11 months instead of 12 and skipping a December payment is generally more accepted. Overcompensating during prosperous times could also provide breathing room when needed. “Securing even one extra mortgage repayment ahead could work as a safety net in case a payment doesn’t process on time and keep you in the positive. That could be a worthwhile strategy,” makes clear Mr. Sheahan.
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