A payment holiday may be an option if you’re struggling to pay your mortgage due to financial hardship.
They have been placed firmly under the spotlight during the coronavirus outbreak as government measures to support homeowners during the crisis include optional mortgage holidays for those unable to keep up with their repayments.
But what exactly is a mortgage payment holiday?
What are the implications of taking one and what alternatives might be available?
We’ve put together this guide to answer these questions and more, and you’ll find the following topics covered below…
A mortgage payment holiday is an arrangement between you and your lender that allows you to stop or reduce your mortgage payments for an agreed period. This would normally be at the lender’s discretion and only permitted if the borrower is unable to make their mortgage payments in full due to circumstances beyond their control.
During the coronavirus crisis, the government initially announced that anyone struggling to pay their mortgage during the outbreak is entitled to take a three-month payment holiday, support that was due to expire at the end of October. It was later extended for an additional six months following confirmation that England will enter national lockdown between 5th November and 2nd December.
If you feel that you need to take a payment holiday, either during the coronavirus crisis or at any other time, be sure to speak to your lender first. If you simply stop paying your mortgage without formally agreeing a holiday you will likely be hit with penalties.
Ask your lender about the alternative options that are available or you can always contact us to get independent advice from one of the brokers we work with.
When you take a mortgage payment holiday, the interest on your debt does not stop. It continues to build up during those months of non-payment and you will end up owing more and having to make higher monthly payments when the holiday comes to an end.
Mortgage payment holidays can also have a negative impact on your credit report, but during the coronavirus epidemic, lenders have been lenient about this and many of them have confirmed that customer credit files will not be affected if a holiday is agreed.
Lenders can choose to, under normal circumstances, report mortgage holiday payments as being in arrears or in an arrangement – both of which can damage your report and score. It is thought that during the corona crisis, the majority will report as being paid on time, so will have no impact.
If you’re thinking of taking a payment holiday, be sure to ask your lender whether your credit report will be affected and be aware of what your outstanding balance will be afterwards.
This is unlikely given the recent confirmations. If you take a mortgage payment holiday under normal circumstances, this could show on your credit report and impact future mortgage or remortgage applications.
If you took a payment holiday during the coronavirus epidemic, though, this is unlikely to impact future credit applications. Be sure to check with your lender that they followed the government’s guidance on this.
To help you get a better understanding of how your mortgage balance will be affected by a payment break, we’ve developed this mortgage holiday calculator tool.
Simply enter your mortgage value, interest rate, term length, the date you took the mortgage out and the length of the holiday in the boxes below and hit ‘calculate’.
The tool will then give you an idea of what your balance will be after the break and how much your payments will increase to.
Either use the tool in the window below or visit the payment holiday calculator page in full here.
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Please note that our calculator tool is designed to produce rough estimates only. For bespoke advice and calculations, make an enquiry and we’ll match you with a broker.
Most experts only recommend taking a mortgage payment holiday as a last resort. This is because your mortgage balance and payments will be higher afterwards and your credit report could potentially be affected, unless the agreement was made during the coronavirus crisis in line with the government’s measures.
There may be payment holiday alternatives to consider, options that most experts would suggest you consider instead. Read on to find out what they are.
If you’re struggling to pay your mortgage due to financial difficulties, some of the possible alternatives to a payment holiday include…
If you’re struggling to pay your mortgage, refinancing with either your current lender or switching to a new deal with another one could help make your payments more manageable. More favourable interest rates than your current ones might be available to you, and that means you would be paying out less each month.
Remortgaging could also help you make up the shortfall in your monthly outgoings by freeing up the equity you’ve built up on your home. If your cash flow problems are likely to be short term, this could help you keep up with your mortgage payments in the meantime.
If you were to switch to an interest-only mortgage, you would only be obliged to pay off the interest each month, which may be more affordable under your current circumstances. With interest-only mortgages, the loan amount would usually be repaid at the end of the term through a repayment vehicle that the borrower must evidence in advance.
During the coronavirus epidemic, some lenders took a flexible stance on these deals and offered certain customers the option to temporarily switch to interest-only.
Whether you can change to an interest-only agreement, and how long you can do so for, will be at the lender’s discretion, so contact yours to find out if you’re eligible or make an enquiry to get independent advice from one of the expert mortgage brokers we work with.
Spreading your mortgage payments out over a longer period by lengthening the term will mean having to make lower payments each month. You obviously won’t pay off your mortgage as quickly, but lengthening your term could make things more affordable.
During the coronavirus outbreak, some lenders offered term extensions as an alternative to payment holidays and they can also consider them in other scenarios. Make an enquiry to speak to one of the independent brokers we work with about whether this is right for you.
A secured loan, or a second-charge mortgage, is a secondary loan that you can take out against the equity in your property. They can be useful if additional borrowing would help you out of a short-term financial fix where remortgaging is not an option.
To qualify for a secured loan you will need to hold enough equity in your home and the lender will want to be confident that you will be able to afford the repayments on this debt when they kick in, alongside your mortgage payments, in the long run.
If you’re over the age of 55, you could potentially access your pension pot to help you make your mortgage payments in the short term. By activating income drawdown, you can withdraw 25% of your retirement savings as a tax-free lump sum and the rest at any time.
Claiming your pension, however, is not a decision that should be taken lightly so be sure to seek independent financial advice before proceeding. Make an enquiry with us and we’ll introduce you to a pension specialist for a free consultation.
Before applying, it’s a good idea to speak to an expert broker to make sure it’s the best option. There may be alternatives, such as those mentioned in the previous section, that could save you money and potential marks on your credit report in the long run.
To enquire about a mortgage holiday, get in touch with your lender but be sure to ask them about the alternatives since payment breaks are usually only recommended as a last resort.
We have included contact details for some of the UK’s leading lenders below…
Due to the longevity of the coronavirus pandemic and its effect on people’s lives and finances, many mortgage lenders extended their payment holiday offers beyond their original expiration dates. You could be eligible for a mortgage payment holiday extension, as long as the total amount of time your break covers doesn’t exceed the lender’s overall limit.
To apply for a mortgage payment holiday extension, simply contact your lender and explain why you need one. But before you do that, it’s a good idea to read up on some of the alternative options we’ve discussed above and speak to a mortgage broker to see if there’s a more cost-effective solution available to you.
If you’re struggling to pay your mortgage, it’s worth speaking to an independent advisor before asking your lender for a payment holiday. There may be more cost-effective options to consider and the brokers we work with can go through all of them with you.
Call 0808 189 2301 or make an enquiry online and we’ll introduce you to an independent broker for a free, no-obligation chat about your options and circumstances today.
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