Recent research suggests that more than 2 million UK home owners are considering taking mortgage payment holidays. But what is a mortgage payment holiday, how do you take one and what are the potential pitfalls? We explain all you need to know.
Essentially, a mortgage payment holiday is an agreement you can make with your lender that allows you to temporarily stop or reduce your monthly mortgage repayments. Whether you are eligible to take a payment holiday, for how long and the conditions you must meet first will depend on your mortgage deal and your circumstances.
For instance, many flexible mortgages allow payment holidays at any time, and you don’t even have to tell the lender why. Some traditional mortgages also allow payment holidays, but many will insist that you make overpayments before you are eligible. That means paying more than your agreed monthly payments until you have built up sufficient credit to take a break from payments.
Lenders may also offer home owners the chance to reduce or suspend mortgage payments if they are struggling to meet the monthly cost, for instance following redundancy. This is usually at the discretion of the lender, however, around 70% have signed up to a scheme that will enable people in financial difficulty to take a holiday of up to two years from making mortgage interest payments – the scheme is underwritten by the government.
Mortgage payment holiday conditions vary greatly from lender to lender, but some typical rules include:
First of all, check your mortgage terms and conditions to see if payment holidays are allowed. Then consider whether a payment holiday is the right course of action – remember that your mortgage payments are likely to go up afterwards when the additional interest has been added.
Before you go ahead, find out what your monthly payments after a holiday would be and think carefully before committing yourself - you may just be storing up trouble for later.
If you still want to go ahead, you MUST contact your lender and apply for a payment holiday. If you simply stop paying without approval from your lender, you will be in arrears on your mortgage and your home will be at risk.
Your lender will be able to tell you whether you have met the conditions required to be granted a holiday and provide all the necessary application forms.
For example, if you have a mortgage of £200,000 at an interest rate of 4.5% over 25 years, your monthly payments will be around £1110.
So, after the first year you will have paid off a total of approximately £13,320, to reduce your outstanding balance to £195,500 (remember you will be paying off interest as well as capital). If you then take a three month holiday, the interest over the three months – about £2,200 – will be added to your outstanding balance, making a total debt of £197,700. To cover this shortfall after the holiday, your payments will go up by around £18.60 per month, to £1128.60.
That might not sound like much, but it all adds up. If you paid that £18.60 extra per month for the rest of the mortgage term (by now, 23 years and nine months), your total repayments would be approx. £335,000 (that's £1,128.60 x 285 payments, plus the £13,320 you have already paid). Without a holiday, your total mortgage debt, including interest, would have been approximately approx. £333,000, so in effect the total cost of your payment holiday is over £2,000.
It is also important to remember that some mortgage lenders will only allow payment holidays if you build up some leeway by making overpayments before you apply. For example, if your mortgage payment is £500 per month, you must have paid an extra £500 off in overpayments before you can take a payment holiday for one month.
Clearly, this depends very much on your circumstances. If you want to take a payment holiday because you have run into financial trouble, you should speak to your lender to find out what your options are. Lenders see repossession as a last resort, and would much rather come to an agreement that will allow you to continue paying your mortgage. Options might include:
In simple terms, there isn’t a good time to take a holiday. If at all possible, you should continue to pay off your mortgage every month. Finding the best mortgage deal for you and sticking to the payments (or overpaying if you can) is the most cost-effective way to deal with mortgage debt.
You should only take a payment holiday if you really have no other option – remember, it will cost you money in the long term, even though it will help you to cope with short term money worries.
The only time to consider taking a mortgage payment holiday is when you are struggling to meet your monthly payments. This could be for a variety of reasons – from maternity leave to redundancy – but it is important that you consider all the options (and their implications) and speak to your lender before making a decision on what to do.