Repaying the mortgage has to be a priority if you’re struggling financially. Otherwise you’re at risk of losing your home. But a mortgage payment holiday could buy you some precious breathing space if you need it.
What is a mortgage payment holiday?
Even if you have the best mortgage rates, making payments every month can become a financial strain. Taking a mortgage payment holiday is like pressing the pause button on your repayments. This can provide some welcome relief if money is tight.
At the height of the Covid-19 pandemic, the government worked with mortgage lenders to ensure they offered ‘Coronavirus Mortgage Payment Holidays.’ This scheme has now expired, but lenders may still offer a range of options depending on your financial situation and the terms of your mortgage contract.
Will a mortgage holiday impact credit score?
A big difference between the government’s coronavirus mortgage payment holiday scheme and any other mortgage payment holidays you arrange with your lender, is that the latter may show up on your credit file and affect your credit score.
‘What usually happens is that lenders will add a ‘flag’ to your account. This will show any arrangement agreed along with the dates and the new temporary payment’, says James Jones, head of consumer affairs at the Experian credit reference agency. When it comes to the damage to your credit score, he says ‘the average hit is 130 points.’
Details of any arrears can stay on your credit file for up to six years. However, ‘you can ask for a ‘notice of correction’ to go on your file, explaining the reason for any missed payments,’ says Jones. ‘Future lenders can then see there was a genuine reason for any mortgage payment holiday. You should do this with all three of the main credit reference agencies, Experian, Equifax and TransUnion.’
Does a mortgage payment holiday come with hidden charges?
Taking a mortgage payment holiday can provide valuable financial breathing space. However, your lender won’t cover the cost as you’ll still need to make up any missed payments, plus interest. It should be considered a short term option. For example, if you’ve been made redundant and are strapped for cash while you’re waiting to start a new job.
Let your lender assess your mortgage payment holiday needs
‘Your lender might temporarily cut your payments, and switch you to paying interest-only for a period. Another option is to extend the length of your mortgage to reduce the monthly payments,’ says Sarah Coles, personal finance analyst at Hargreaves Lansdown.
‘Extending your loan will come at a cost. If you pay your mortgage for longer, you’ll pay more interest overall. However, because it’s spread over a longer period you may find it easier to manage.’
The golden rule is to speak to your lender if you’re concerned. If your lender does not know you’re having problems, it can’t help. If you’ve got a previous track record of making payments on time, and have even built up a financial buffer from overpayments, your lender may allow you to pause or reduce payments for between six and 12 months.
Lenders set their own terms and conditions. Some may insist you’ve had your mortgage for at least a year, as with Halifax. Others may check you haven’t taken a mortgage payment holiday within the last few years (excluding any taken due to Covid-19).
Past overpayments may help you appeal
If you’ve previously overpaid on your mortgage, it’s possible any agreed mortgage holiday may not show up on your credit file. ‘It’s your lender who decides what gets reported on your credit file’, says Jones. ‘It’s worth having a conversation with them to see if they’ll recognise that the account won’t be in arrears.’
Additional help from your mortgage lender
Before applying for a mortgage holiday research other options first. Depending on your current deal, your lender may be able to switch you to a fixed cheaper deal to cut monthly payments. Do be aware, though, that you could incur set up fees for this.
If you’re likely to have longer term issues meeting your mortgage payments, some lenders may allow you to extend your mortgage term. This will mean lower, more affordable monthly payments, but in the long term it will cost more. It’s important to check if there are any fees associated with doing this.
Moving to an interest-only arrangement for a period may also be possible. This is where you cover only interest charges, but not capital repayments. You will, however, need to make plans for repaying the capital in the end.
Check insurance policies
If the reason you’re struggling is due to sickness or redundancy, check if you’ve got insurance to cover this.
Mortgage payment protection insurance and income protection are the two policies that should do the job. Both pay a monthly sum, for a maximum time period. Since the pandemic however, fewer policies may now cover redundancy. Mortgage payment protection insurance will typically cover your mortgage payments and usually pay out for around a year. Some policies may last longer and terms and conditions vary.
An income protection policy is designed to cover your mortgage along with other household bills. You usually get a percentage of your salary each month.
Both usually have an initial deferral period, during which time the policy won’t pay out, so you can’t take out a policy and then claim a week later.
If you’re claiming certain benefits, (including Universal Credit, Income Support or Jobseeker’s Allowance), you may be eligible for government support towards mortgage payments. Visit Gov.uk for information.
This may cover some of the interest on loans of up to £200,000, (or £100,000 if you’re over state pension age). It won’t cover capital repayments, or even guarantee to cover all your interest. The government uses its own interest rate for calculations, currently 2.09%.
‘While standard variable rates differ, they tend to be higher than this, so it might not cover your mortgage,’ warns Sarah Coles. ‘And there are so many hoops to jump through that it can be difficult to qualify. Plus, there is a 39 week wait between when you apply and when you may be able to get help.’
If agreed, this is paid as a loan, which you will need to repay, along with interest, when you sell your home.