What the heck are REMORTGAGES??

As two million people consider taking a mortgage payment holiday, a new report has a stark warning

Taking a mortgage holiday may not b the ideal answer for homeowners battling the credit crunch - it could push up monthly repayments by £54 million and total interest by £7.2 billion.

Louise Bond of price comparison website uSwitch.com said: "Mortgage payment holidays are a great facility for consumers that are looking to take a short break in order to get married, have a baby or generally chase their dreams.

"However, in this climate the facility should not be used by people that have been struggling to pay their mortgage or keep up with general living expenses for a long period of time.

"A holiday will not make the underlying financial issues disappear. In fact, both the repayments and the debt will actually go up after the holiday and, if anything, it could actually make the problem worse.

"These holidays are simply an agreed deferment but it is by no means a 'freebie' and the interest and the repayments still have to be made at some point.

"Just last month, two leading mortgage providers, Nationwide and Halifax, did the right thing and reviewed their policies on payment holidays. Halifax no longer offers this facility to those who have been made redundant and Nationwide is considering a new rule that will only allow consumers with at least 25% equity in their property to take a payment holiday.

"This is something every mortgage provider should now be addressing to ensure people do not end up in a worse financial situation after the holiday. With house prices expected to fall further in the next 12 months, this could just push homeowners over the edge into negative equity making it really difficult to remortgage."

Mortgage misery

Despite the Government's promise to defer interest payments on mortgages for up to two years, 729,054 people in fear of redundancy are taking matters into their own hands by considering or applying for a mortgage payment holiday

• Over one million (33%) people are thinking about or have already frozen mortgage payments to keep up with the cost of living - one in five (19%) to cover holiday costs
• A 12 month payment holiday on £150,000 will increase the total interest by more than £10,000 and monthly repayments will go up by £80 after the break

With house prices predicted to fall by up to 15% next year from an average of £158,442 to £134,675, the cost of a payment holiday could push consumers closer to negative equity

Payment holiday

Over 800,000 consumers (7%) have already taken a payment holiday, these people have seen their total interest increase by £2.8 billion and monthly repayments shoot up by £21 million

Following a 12 month holiday, a mortgage for £150,000 will increase by more than £10,000 and the monthly repayments will go up by £80 - this means that consumers with low levels of equity in their homes could find themselves struggling if they need to remortgage.

This may provide a quick fix for these consumers, but with banking experts predicting further house price falls of up to 15% in 2009, this will bring the average house price down from £158,442 to £134,675. For consumers that have anything less than 25% equity in their property, the costs incurred from the payment holiday coupled with falling property prices could push them into negative equity.

Historically, this facility has been used by consumers embarking on a life changing project such as a wedding, a new baby or an extended overseas trip. Unfortunately, today's financial climate is pushing three million more consumers down this road just to keep up with the cost of living (1,046,034) or to cover holiday costs (602,262). However, 1.4 million consumers think that the interest is frozen during this holiday and 6% think it's completely free so it's unlikely these people will fully understand the long term financial implications of this decision.

Every mortgage customer has to 'apply' for a payment holiday and most providers stipulate that the customer must have successfully paid the mortgage for a specific period of time. With some flexible mortgage customers already being asked to make a lump sum payment to their provider as the value of their property value has dropped below 90% of the mortgage amount, people could find themselves in hot water if they don't fully understand the financial implications of a payment holiday.

Four month holiday

Already, 7% (821,800) of mortgage holders have taken a payment holiday and 2% are in the process of applying. With the average holiday at around four months, these consumers have already seen their monthly repayments increase by £26 and their overall mortgage go up by £3,436. Collectively, these consumers will be paying £21 million more on their monthly repayments and their total interest will have gone up by £2.8 billion.

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