There are a lot of expenses associated with getting on the property ladder. You have to get your deposit together and pay stamp duty, legal fees, insurance, and many other costs before you start to even furnish your house.
Many banks now routinely offer a deferred start to new homeowners, which allows them to postpone starting their mortgage repayments for 3-6 months. This sounds great in principle but could be very costly.
Key Takeaway
What many home buyers fail to consider is that even though you are deferring the start of your mortgage repayments, the interest is still charged during this deferral period.
The interest is then added to the balance on your mortgage, but your term remains the same. Repayments are then adjusted upwards to repay the loan within its original term.
Higher monthly repayments
Let’s take a quick example to illustrate the additional costs that will need to be repaid.
In this example, the borrower has a mortgage worth €350,000 over a 30-year term at an interest rate of 3.5% and decided to defer the mortgage repayments for the first 6 months.
The mortgage term begins on the 1st of January 2023 and repayments officially begin on 1 July 2023.
| Date | Interest | Balance |
|---|---|---|
| 1/1/2023 | €0 | €350,000 |
| 31/1/2023 | €1,020.83 | €351,020.83 |
| 28/2/2023 | €1,023.81 | €352,044.60 |
| 31/3/2023 | €1,026.80 | €353,071.40 |
| 30/4/2023 | €1,029.79 | €354,101.20 |
| 31/5/2023 | €1,032.80 | €355,134.03 |
| 30/6/2023 | €1,035.81 | €356,169.84 |
The interest you pay on a mortgage is very much front loaded and it can take a long time before your reach the mortgage tipping point where more than 50% of your mortgage repayment is paying down the principal of the loan.
As we can see from the above schedule, over the 6-month deferred start to the mortgage, a total of €6,169.84 of interest is accrued. To compensate for this, the mortgage repayments will need to increase over the rest of the mortgage term.
Is it worth it?
The home buyer needs to weigh up whether the slightly higher repayments over the term of their mortgage are worth it versus the additional interest they will add to their loan.
It might be the case where the need for cash is so great at that point when you first move into your forever home that you may decide that the additional interest is worth it.
While the impact won’t be too pronounced, you could end up with an additional €10-€30 increase in your mortgage repayments over the rest of the term. While it is not hugely material in any given month, over the space of 25-35 years it is a large sum of money.
Other payment breaks
Some banks also offer payment breaks mid mortgage, or even periods where you only need to pay the interest.
Prospective home buyers should try and find out as much information about what schemes each bank they are considering going with an offer in terms of payment breaks, as you never know what can happen that might put you into difficulty, and you must know your bank is flexible and not going to take legal action immediately if payments are missed.
Let us look at Bank of Ireland for example and their Mortgage Flexi-Options:
3 month payment break – You can take a 3-month payment break up to 3 times over the life of your mortgage loan
Skip up to 2 payments a year – if you would like to have some extra cash to spend at certain times of the year, you can spread your mortgage repayments in a year over 10 or 11 months and skip the other one or two.
Mortgage overpayments – you can make unlimited overpayments on variable-rate mortgages and 10% overpayments on fixed-rate mortgages without incurring a fee.
Disclaimer: This blog post is for informational and educational purposes only and should not be construed as financial advice.
