How does taking a payment holiday due to COV-ID 19 affect my mortgage?

Due to the COV-ID 19 outbreak, many people are finding themselves furloughed and on a reduced income or have fallen ill and must take time to recover and rest. This can result in a loss of income for some households, making it difficult to meet mortgage repayments. Chancellor Rishi Sunak announced on the 17th March that lenders would be able to offer three-month mortgage payment holidays for those who are having difficulty making repayments. This allows people to have an effective ‘break’ on their payment and feel safe in their homes while following Government guidance on social distancing.

A payment holiday is a pre-arranged agreement between yourself and your lender with your lender allowing you to postpone one, or more of your monthly repayments. If you were accepted for a payment holiday, you’d be able to postpone a pre-set amount of monthly repayments, but it’s important to remember you would still owe the money and accrue interest on it, you just would take a break from paying it back. Payment holidays have been around for years, sometimes offered as a feature of some loans or mortgages, but not all lenders offered them, and they were often subject to a strict criteria. For these unprecedented times, payment holidays are being used as a method of easing financial strain some households may be facing due to the Government measures put in place to ease the spread of coronavirus, making them far more accessible for those who qualify.

How do I apply?

Contact your mortgage provider, either online or via telephone to set up a payment holiday. Payment holidays will be given at the discretion of your lender. You can see our handy list of lenders here

How long will my mortgage holiday last?

The Government has announced that lenders can offer payment holidays up to three months.

How do I pay it back?

When your payment holiday ends, your mortgage repayments will increase to reflect the money owed over the term of the holiday, including accrued interest. Your lender should tell you how much your monthly repayments should increase after the holiday term ends when they contact you to confirm the approval of your payment holiday, or when you apply.

Does it affect my credit rating?

Equifax, Experian and Transunion have announced that credit scores won’t be affected by repayment holidays during the pandemic, with an emergency payment freeze. This means that if you take a repayment holiday, you won’t have missed or late payments flagged up on your credit report and your score should stay unaffected. This is great news for those who have worked on building a healthy credit report and have been financially impacted by COV-ID 19.

It’s important to remember this only applies to payment holidays that have been approved. Ceasing payments without an agreement with your lender will have a negative impact on your credit score and not all lenders will offer payment holidays.

Things to consider:

  • Eligibility is decided by the lender, and it’s intended for those who are truly struggling to meet repayments and have been seriously impacted financially by the effects of coronavirus. Check the criteria for a payment holiday with your lender to find out if you’re eligible.
  • Interest will still be due on your mortgage during a payment holiday, and as the balance won’t be decreasing monthly as it usually would on a repayment mortgage, you could end up with a higher balance and more to pay over the originally agreed mortgage term.
  • When the payment holiday ends, your mortgage balance and repayments will have increased as you will still need to repay the money owed. Lenders will have different methods for repayment so it’s important to contact them and find out how the repayments would be made after the holiday before applying. You might be able to extend the term of your mortgage, but this would be at the discretion of your lender.
  • If you have a tracked mortgage, where the interest rate matches the Bank of England’s base rate, usually at a few percent higher, it’s likely your monthly repayments will have gone down as the Bank of England’s base rate is at an all-time low of 0.1%. This could allow enough of a saving to continue to meet your repayments. https://www.bankofengland.co.uk/boeapps/database/Bank-Rate.asp.
  • Mortgages that have the interest calculated at the lenders standard variable rate would see little to no change in the interest rate, and it may be worth looking into remortgaging onto a fixed-rate mortgage with a better rate or deal before taking a payment holiday, as you might end up paying more per month after the holiday ends. If you’re struggling for money and have equity in your home, remortgaging could also be a way of accessing the money tied up in your home and offer some relief. Get in touch with one of our specialist advisors to find out more.
  • Equally, if you’re on a fixed-rate mortgage, you might not be getting the best deal or rates on the market, and if you’re struggling to meet repayments, remortgaging could free up equity to give a financial cushion, or lower your monthly repayments making it easier to meet them.