Why taking a mortgage payment holiday could affect your future borrowing

A few weeks ago, we shared our complete guide to taking a mortgage payment holiday. In it, we said:

“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.”

However, while the credit reference agencies agreed that taking a payment holiday would not affect your credit rating, the fact you have suspended your mortgage payments could affect you in the future in other ways.

Here’s what you need to know.

Mortgage payment holidays shouldn’t affect your credit file…

To help support homeowners through the coronavirus pandemic, early on in lockdown the government announced that borrowers would be able to take a three-month mortgage payment holiday.

The BBC reports that one in six mortgage holders, or nearly two million people, have suspended their payments during the pandemic.

Now, with the three-month period coming to an end, many borrowers will be considering extending their payment holiday.

Economic Secretary to the Treasury, John Glen says: “We’re doing everything we can to help people with their finances at this difficult time, and that includes making sure people get the support they need with their mortgages.

“That’s why we’re working with the banks and lenders to extend payment holidays if people need them.”

In an update published in May 2020, the government was clear that taking a mortgage payment holiday should not adversely affect a borrower’s credit file:

“Payment holidays and partial payment holidays offered under this guidance should not have a negative impact on credit files.”

However, while the advice from both the government and the Financial Conduct Authority (FCA) states that a mortgage holiday will not affect your credit record, borrowers are finding that doing so could affect the ability to get credit in the future.

…but they could affect future lending decisions

While your credit report should not be affected by taking a mortgage payment holiday, it could affect your chances of getting a loan or other credit in the future. This is because, when you apply to borrow money, lenders consider a wide range of factors.

Sarah Coles, personal finance analyst with Hargreaves Lansdown, explains: “Banks will look at your payment history. And if you’ve got a three-month gap around this period, they are going to know that has clearly come from a mortgage holiday.

“If you’ve got a six-month gap, they are going to know you’ve had to extend it. And that will give them a really clear indication that you were having some financial issues at the time. So, it will then make it harder to borrow.”

When making a lending decision, a bank or building society will use information other than your credit file to make their decision. This might include bank account information, or changes to your household income and expenditure.

Taking a mortgage payment holiday, or extending your holiday, could indicate to a lender that your personal finances are stretched, and may therefore impact their decision to lend to you.

Website MoneySavingExpert found that lenders, including Bank of Scotland, Halifax and Lloyds are making lending decisions ‘based on a full understanding of customers’ circumstances and affordability, and that changes of circumstance due to coronavirus would be considered’.

Tom Martin, remote mortgages director at the Halifax, explains: “We base our decisions on a full understanding of a customer’s up-to-date circumstances.

“We do take into consideration your latest financial position, but we recognise as well that these are unprecedented times and we will consider individual circumstances as part of that process.”

The website did find some lenders that won’t use this information. Barclays, for example, says a payment holiday with another lender won’t have any impact on the likelihood of being accepted for a new mortgage with it.

Get in touch

If you need advice on your current mortgage, or you’re looking for a brand-new mortgage, we can help. Please get in touch by email enquire@london-money.co.uk or call us on (0207) 808 4120.

Please note

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