A Mortgage Holiday is Not a Rent Free Period
So, just to give you a bit of back history here. As you know, when the COVID-19 pandemic hit the UK, and the UK went into lockdown. The government suggested plans that tenants would be able to have a three month rent holiday, and that landlords would be able to have a three month mortgage holiday as well. There was a bit of a knee jerk reaction to this as you might expect. Many tenants said to owners, "I can't afford to pay, "I want to have a holiday." I think some of them didn't realise that it was a deferment of payment, it's not a rent free period.
Also, a lot of landlords thought, "Actually, if I don't have to pay my mortgage, I don't want to pay my mortgage". They applied for a mortgage holiday. As a result of this, many of the lenders literally closed their doors to new applications. This is because they had to divert many of their staff who were dealing with new applications, on to dealing with the tens of thousands of landlords who applied for mortgage holidays.
The concept behind a mortgage holiday is actually quite good. While the government is saying, "Look, we understand if you're struggling "to pay your mortgage. You can have a mortgage holiday, that will defer the payment, and it'll be added to the end of your loan. "Obviously, you do need to pay it back. "But, we want to help you in these difficult times". They encouraged all the lenders to adopt this policy and many landlords went for it.
“The concept behind a mortgage holiday is actually quite good”.
Are You Making a Mistake?
I completely understand if you've had tenants who are stopping paying the rent. That's a pretty concerning thing, and obviously paying your mortgage is really important. You don't want to adversely affect your credit rating by not paying your mortgage. The government very clearly said, and the lenders have said, "If you go for these mortgage holidays, it won't have an adverse effect on your credit rating".
They were very clear about that. I think that's probably the case. So, many landlords applied for them. It might be because the landlords had tenants not paying, and they couldn't afford to pay the mortgage. But, I think a lot of landlords thought, "Great, if I don't have to pay the mortgages, "I'll have extra cashflow coming in. "That's a good thing. "I'm just not gonna pay the mortgages." I think, and I might upset some people here, but I think that's a bit of a mistake.
“What that means is, whenever you go for a re-mortgage, a further advance, or even a purchase of another property, the lenders want to understand your existing portfolio”.
The Perspective of a Lender
Let me explain my rationale, and it appears that my concerns are now becoming reality. I was worried about this. If you are a property owner, a landlord, and you have more than four properties, you are considered to be a portfolio landlord. What that means is, whenever you go for a re-mortgage, a further advance, or even a purchase of another property, the lenders want to understand your existing portfolio. They want to understand the loan to value, they want to make sure the rent covers enough to make sure you can afford to have these extra properties. Maybe that's a good thing to make sure people are not overexposing themselves, and they can afford the commitments they're making when taking out new finance.
But, the problem is this. If you have previously gone to your lender and said, "Oh, I can't afford to pay my mortgages. Can I have a mortgage holiday please?", although it doesn't adversely affect your credit rating, if I was a lender I'd be thinking, "Well, hang on a minute, do I really wanna give this person more finance if they were struggling?".
I think, and for the last two months, I've been saying on some of the webinars, and I've been telling my clients, if you don't have to take a mortgage holiday, I would recommend not taking a mortgage holiday.
Only Take the Mortgage Holiday If You Really Need It
The first one is, there's a great quote, and forgive me, I can't remember who said it. About, "When you're making a decision "that's a permanent decision, "that has a permanent impact, "make sure you're not making it "regarding a temporary situation." So, don't make permanent decisions about temporary situations. That's the first thing.
If you need it, of course take it. But, if you don't need it, I would say just don't take it. I've been speaking to several brokers this week, and they're telling me that many lenders are now saying, "If you've taken a mortgage holiday, we don't really want to lend to you." They are concerned about your ability to afford to pay the mortgage, and that's a very genuine concern. A lot of people who've maybe taken out mortgage holidays as a bit of a knee jerk reaction, are now having a bit of a problem. Lenders are concerned about lending more money to them. What can you do about this?
Well, if you haven't taken them out, no problem at all. If you have taken them, I think if you can afford to pay the mortgages, I would contact the mortgage company saying, "Look, I've actually, it wasn't as bad as I thought. I maybe reacted too quickly. I'd like to pay the mortgage off, and I want it put on my file that I've actually completely paid those back earlier than expected, and I'm up to date". This is an advice that mortgage brokers have given to me, and I'm passing it on to you. I'd like to share with you the following learning points from this.
The first one is, there's a great quote,"When you're making a decision that's a permanent decision, that has a permanent impact, make sure you're not making it regarding a temporary situation."
“You can use a credit card, or something to make payments to make sure you’re clear, and that then means that your credit score is intact, and you can get finance moving forward”.
The other thing is, in my book, Property Magic, which I published initially back in 2008. It's now the sixth updated edition. I talk about the Five Golden Rules. Golden Rule Number Five is, you must always have a Cash Buffer. Some money or some facility put aside that you can use to cover unexpected expenses. Now obviously, no one ever thought this pandemic would happen as badly as it did. When I wrote the book, I was talking about concepts such as, if a tenant maybe isn't paying the mortgage, and you have to get them evicted, and they cause damage that's not covered by insurance, you're going to have to cover the mortgages, the bills, everything until you get them out.
The cost of getting them out. Once they're out, maybe spending money getting the property back up to scratch, so you could rent it out quickly and easily. You need to have some money put aside. It could be some money in a bank account, the cash buffer. It could be a credit card facility. If you look at what's happened right now, if you are struggling to pay your mortgages because tenants weren't paying you, the lenders will accept credit cards to make your mortgage payment. That's not a long term solution, obviously. Ideally, you're going to pay those credit cards off. But, its lease is a short term thing to help your cashflow so you can pay your mortgages. This is one of the most important things you need to do if you're a property investor.
Please prioritise paying your mortgages on time in full. Now, if you miss a mortgage payment, the lenders will contact you. As long as you make up that payment usually before the end of that month, it may not actually appear on your credit rating. You can use a credit card, or something to make payments to make sure you're clear, and that then means that your credit score is intact, and you can get finance moving forward.
Be careful about making knee jerk reactions when things happen. Use your thinking time wisely. Consider, do I really need to do this or not, and hopefully you can learn from these lessons. If you haven't read, Property Magic, or if you have read it, go back and re-read it, make sure you understand the Five Golden Rules. The Five Golden Rules really will minimise the risks you have when investing, and it'll maximise your returns. You really need to make sure you understand those. If you haven't read it, go and get it on Amazon. It's available on audio as well. You can get it from Audible. Pick it up. It doesn't teach you everything about property. But, it will inspire you and give you a whole range of things you can do within property.
As ever, I encourage you to invest with knowledge, invest with skill.
6th Revised and Updated Edition
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