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Financial Dictionary - Mortgage grace period

Mortgage grace period

A grace period of a mortgage is the period over which, as holders, we stop paying the monthly instalments on the loan without incurring a penalty for late payment (meaning total grace), or where we pay interest only, thus reducing the instalments significantly (in which case it would be partial grace).

It is entirely possible that unforeseen events may affect our economy and make it more difficult for us to meet our monthly payments. In these cases, this type of insurance might be a wise choice.

It can be useful, for instance, if we need to save after buying our home (in this case we could pay a smaller instalment over the first few months); or if we are the ones selling and need time to close the deal, or if we want to avoid non-payment. It can also be useful if our property is currently being built or refurbished. And it might well be worth it if we lose our job or have our wages cut and cannot keep up with the mortgage payments.

In any case, it is best to ensure that these delays are envisaged in our mortgage contract. If not, we can attempt to negotiate them with the bank, although the bank is entitled to say no.

We can get a payment deferral if we take out a mortgage that includes this option in its terms and conditions. Otherwise, we can attempt to negotiate it with our bank down the line. We may also avail ourselves of the Code of Good Practices, assuming we meet the exclusion threshold, to apply for a maximum interest-only period of five years.

It is important to think carefully before proceeding, as this option comes with certain novation costs (of amending the terms and conditions for enabling the interest-only period) and arrangement costs.

Moreover, when the grace or interest-only period ends, our instalments will likely increase because interest will continue to be generated, and when the deferment ends, it will be added to the cost of the mortgage. In short, this option always pushes up the total price of the loan.

In fact, there are other alternatives to requesting a grace or interest-only period, such as negotiating with our bank to lower the interest rate (thus reducing the amount of the instalments we pay); or extending the term of the loan by a few years (and therefore paying less each month); or reducing our linked products (removing certain products that we arranged at the outset).