With the lockdown continuing in light of the coronavirus pandemic, you may find yourself under increasing financial strain and wondering whether it’s time to take a mortgage payment holiday. But what exactly is this, how does it work, how do you apply for one, and what happens when the ‘holiday’ has finished? Here, we’ve detailed everything you need to know to make an informed decision as to whether a mortgage payment holiday is right for you.
What is a mortgage payment holiday?
A payment holiday is an agreement with your lender that you don’t have to make your monthly repayments for a certain period of time. In response to the coronavirus pandemic, the government announced that 3-month mortgage holidays are to be offered to those who are struggling to manage their finances during this time.
Can you apply?
This 3-month mortgage payment holiday is available to you if you are up to date with your repayments. If you are currently in arrears, speak to your lender who will review your current arrangement — there may be a better option for you rather than making a payment holiday.
If you are a buy-to-let landlord, you can also apply for this payment holiday provided you can show that your tenants have been affected financially by this crisis. When taking a payment holiday on this basis, it is assumed that you will, in turn, provide relief to your tenants from their rental payments.
The advantages of taking a mortgage holiday
Your mortgage payment is likely to be your biggest monthly outgoing. With a diminished income due to the impact of COVID-19, a 3-month break from these payments helps relieve your financial pressure and gives you breathing space to manage your other finances.
The Financial Conduct Authority (FCA) has asked lenders to treat clients in a fair manner during this unprecedented time. With this in mind, you shouldn’t need to pay a fee to arrange a payment holiday.
The drawbacks of utilizing a payment holiday
This mortgage payment holiday is simply a break from making your usual repayments for a period of 3 months but the payments are still due at a later date. You should also be aware that, even though you’re not making your monthly payments, interest will still be charged on the amount you owe.
Both of these factors mean your mortgage balance will be higher at the end of the ‘holiday’ period. Depending on your mortgage deal terms, you may be looking at higher monthly repayments once the 3-month payment holiday ends. It’s important to check the lender’s stipulations regarding payment of the arrears before you agree to a mortgage payment holiday.
Your credit score will be protected
You don’t need to worry that taking a mortgage payment holiday will affect your credit rating. The credit reference agencies Equifax, TransUnion, and Experian have confirmed that your credit score will be protected. This is thanks to the ‘emergency payment freeze’, which is a special measure that has been introduced to ensure your credit score stays as it is during the payment holiday.
How to apply — don’t just cancel your direct debit
It’s important to apply for this 3-month mortgage payment holiday via your lender. Don’t just cancel your direct debit as this will go against your credit score because it counts as a missed payment as opposed to a payment holiday. If your credit file registers a missed payment, this might affect your likelihood of being able to remortgage or borrow in the future.
Due to the increased demand for lenders since the coronavirus crisis began, many people have found it hard to get through to their lenders on the phone. In response to this, many lenders have now set up the facility for customers to apply for a mortgage payment holiday online. Check your lender’s website first to see if this online application option is available to you.
Will the payment holiday be extended?
Currently, this mortgage payment holiday is available for 3 months. However, the FCA will be reviewing the guidance they have provided for lenders within the next couple of months. In light of the circumstances, it’s possible that the FCA might advise lenders to extend the period for mortgage payment holidays. If this is the case, they will amend the guidance issued to lenders.
Don’t rush straight into a mortgage payment holiday as a way to relieve some of your financial burdens. Remember that the payments are deferred, not written off, so you still have to cover them at a later date. Your interest payments are also accrued so your mortgage balance will increase.
With the current low base rate set by the Bank of England, it’s a great time to switch to a new mortgage product and benefit from lower monthly payments. You can also consider remortgaging and, if you have equity in your property, to opt for equity release to help manage your finances and tide you over during this time.