Your complete guide to taking a mortgage payment holiday

Millions of households in the UK are struggling to meet their regular monthly commitments as a result of the coronavirus pandemic. With employees furloughed and self-employed workers seeing their work dry up, it’s a tough time for many.

Your mortgage is likely to be your biggest financial commitment and the payment you’re most worried about. To tackle this, the government has announced that they will work with lenders to allow borrowers to take a ‘mortgage payment holiday’.

A payment holiday will provide flexibility in repaying your mortgage by allowing you to stop or reduce your monthly payments for up to three months. While this could provide much-needed help, it’s not ‘free money’ and it won’t be suitable for everyone. Here’s what you need to know.

One in nine borrowers take a mortgage payment holiday

Figures have revealed that one in nine mortgage holders in the UK have so far taken a mortgage payment holiday to cope with the effect of coronavirus.

To date, lenders have agreed that 1.2 million homeowners can delay repayments as jobs are cut and wages reduced.

The BBC reports that, for the typical capital and interest repayment mortgage, about £775 is being deferred each month.

However, a payment holiday may not always be the right approach. Stephen Jones, UK Finance chief executive, says: “Payment holidays aren’t always the right solution for everyone. We would therefore encourage any mortgage customers concerned about their financial situation to check with their lender so they can find out more information on the support available and how to apply.”

So, what are the pros and cons of taking a mortgage payment holiday?

The pros of taking a mortgage payment holiday

The biggest advantage to taking a mortgage payment holiday is that it relieves some pressure for a while. If your income has fallen, you will have one less commitment to worry about when you are budgeting for your monthly outgoings.

Taking a mortgage payment holiday is also a relatively cheap way of dealing with short-term problems. While it is important to remember that a payment holiday is not ‘free money’ – you have to pay back what you owe eventually – low interest rates mean that you won’t add much to your monthly repayments once your holiday is over.

The Guardian report that a £200,000 mortgage taken out in May 2018 at a 2.5% rate costs £897 a month. If you take a three-month holiday, afterwards the cost will rise to £910 a month.

Taking a payment holiday also preserves your credit record. Experian, Equifax and the other credit reference agencies have agreed an emergency payment freeze, and this ensures your current credit score is protected for the duration of an agreed payment holiday.

The other advantage to using this approach now is that banks and building societies are obliged to offer a payment break. Before, many lenders did have this option but only used it in exceptional circumstances. Now, they are obliged to consider your request.

What you should bear in mind if you take a mortgage payment holiday

With more than a million borrowers already taking a payment holiday, many industry experts believe people are panicking and acting too quickly.

For example, if you or your partner are still receiving an income, and your normal outgoings have fallen, it may be better to defer taking a payment holiday until you really need it.

In addition, if you only have a short time remaining on your mortgage, taking a three-month break could result in your repayments rising sharply once the holiday ends.

As any missed payments have to be made up over the remaining term of your mortgage, if you have relatively few payments left you will see your monthly repayment rise significantly. This could lead to more financial problems once the holiday is over.

An important note

If you are struggling to meet your mortgage payment, don’t just cancel your direct debit to your lender.

There have been reports of some borrowers simply stopping their mortgage payment, rather than speaking to their lender first. Avoid this if possible as it could damage your credit record.

Alternatives to taking a mortgage payment holiday

There are a couple of alternatives to taking a mortgage payment holiday:

  • Switch your rate – if you are on your lender’s Standard Variable Rate, perhaps because your fixed or tracker deal has recently ended, you may be paying more than you need to. Remortgage deals are still available, or you can speak to your existing lender about switching onto a deal to reduce your repayments
  • Switch to an interest-only mortgage – your lender may allow you to switch to an interest-only mortgage for a period. This would reduce your monthly repayments, but you would still owe the capital you don’t pay back during this period.

Get in touch

If you are thinking about taking a payment holiday, or you’d like to explore other options for dealing with your mortgage during the coronavirus pandemic, please get in touch. Email enquire@london-money.co.uk or call (0207) 808 4120 to find out more.

Please note

Your home may be repossessed if you do not keep up repayments on a mortgage or other loans secured on it.