If decided to apply for a grace period on your mortgage, the first step is to check the terms and conditions with the Bank. A grace period is something to fall back on if you have a temporary shortage of liquidity, but while it can help you out in that immediate situation, you need to bear in mind the costs involved.
You can apply for a grace period when you take out your mortgage or at a later time.
In the first case, it will probably be because of a shortage of liquidity as result of the initial outlay involved in buying a property.
If you apply for a grace period during the life of the mortgage, the reason will usually be because you are experiencing temporary financial difficulties.
How much does a mortgage grace period cost?
We can't give you a categorical answer to that question, but we can offer some useful guidance.
The first thing you should know is that, regardless of the original terms and conditions of your mortgage (Euribor, spread, term, etc.), applying for a grace period will always increase the final price of the mortgage. There are two reasons for this.
The first is that your monthly instalment will be reduced during the grace period but once it ends, you'll pay more per month than the instalment agreed originally. The reason for this is during the grace period you will only pay the interest, but once you resume the original terms and conditions the interest will be higher because outstanding principal will also be higher.
The second thing to remember is that changing the original terms and conditions entails a novation of the original mortgage, which means drawing up a new public document with all the related costs.
Who can apply for a mortgage grace period?
Just as when the initial mortgage is approved, the Bank will carry out a risk assessment before approving a grace period.
Remember, if you're thinking about applying for a grace period, you really need to take a hard look at your personal situation because although this is a useful solution for tiding you over during temporary financial difficulties, it will add extra costs to your original mortgage.
Disadvantages of a mortgage grace period
Although a grace period has obvious advantages, you should take into account the disadvantages as well, all of which are financial:
- It will increase the final cost of the mortgage and the instalments.
- The approval of a grace period entails a novation of your original mortgage, which means drawing up a new agreement before a notary.
- Lastly, while a grace period can help you overcome a temporary financial difficulty, you will still have a debt and an obligation to the Bank.