As the cost-of-living crisis deepens, you may be evaluating your regular monthly expenses and looking for things to reduce.
If you’re lucky enough to own a home, chances are your biggest monthly expense will be your mortgage. But will your lender allow you to cut your payments if you explain that you’re having trouble? And how does that affect your credit score?
If you have life insurance or an annuity, can you interrupt your payments and what will be the consequences?
Take a break from your mortgage
According to UK Finance, the trade association of banks, mortgage lenders should offer “forbearance” to any customer who is experiencing financial difficulties or is unable to make their mortgage payments.
This could take the form of an approved payment holiday, where your lender gives you permission not to pay your mortgage for a short period of time, usually up to three months. Alternatively, with your lender’s permission, you can reduce your monthly repayments.
There are costs associated with these arrangements. Any payment freeze will be noted in your credit bureau, which can affect your next loan request – for example, you may be charged higher interest rates. You are also expected to pay back anything you missed once you are no longer in financial trouble. Your mortgage is likely to cost you significantly more in the long run.
“The big downside to paying holidays is that you end up having to deal with a larger mortgage when you start making payments again,” says David Hollingworth of mortgage broker L&C.
Every day that you do not reduce the original amount you owe, interest will accrue on it. You also have to make up the missing payments.
That means “you end up paying a higher rate on the balance of the mortgage — because you have a larger mortgage,” says Hollingworth.
Additionally, lenders are only likely to agree to a payment holiday if they feel your situation is temporary and a short break will give you enough breathing room to get back on your feet. “You’d want to be sure it was the right thing because it’s going to cost you more money in the long run,” he adds.
Cancel life insurance premiums
It is possible to reduce your life insurance coverage or take a brief pause in payments without affecting your coverage – but only if your insurer agrees.
LV= allows this – but you can only benefit if your policy (for income protection, critical illness or life insurance) has been in effect for a year or more, you have a good payment history and are less than three months behind on monthly premium payments. You must declare that you have suffered a significant drop in income or that your usual income has ceased. The payment break is only offered for one month at a time, for up to three months.
You do not have to make up the missed contributions and your insurance cover remains in place throughout the payment interruption. After that, your rewards will return to your normal level and you will not be able to request another break after that.
Your insurer, if not LV=, may take a different approach. “If you’re having trouble keeping your premiums paid, the first thing you should do is contact your insurer to see what they can suggest,” says Malcolm Tarling of the Association of British Insurers. “You could follow LV=’s example and say, ‘We can stop your rewards and you can enjoy a reward vacation for a period of time.’ Or they can say that you can lower your premiums, but you would have to accept a corresponding reduction in the sum insured.”