What is a mortgage payment holiday, how do you take one and what are the potential pitfalls? We explain all you need to know.
Check your mortgage terms and conditions to see if payment holidays are allowed
Find out how much your monthly payments would be after the holiday ends
Make sure it is right for you and that you will be able to afford to pay the new amount
You then have to contact your lender to find out how to apply for a mortgage holiday. They will let you know if you meet their conditions and send you any application forms.
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.
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.
They usually last a few months and after the mortgage holiday ends you have to start making payments again. They will usually have increased to make up for the months you missed payments and because of the extra interest charged.
If you are considering a payment holiday in the future because you are struggling to afford your mortgage, you could get a new mortgage deal instead.
If you can get a cheaper mortgage deal, your monthly payments go down. This could make it easier to afford so you can avoid the costs of a mortgage payment holiday.
If you need help finding the right deal or you have bad credit you can contact a mortgage broker.
If you can currently afford your mortgage but are worried about your income falling in the future, you could take out insurance to cover your payments.
This can pay out a monthly amount if you lose your job, become ill or injure yourself. There are two main types:
Income protection insurance usually pays a percentage of your monthly salary (e.g. 65%)
Mortgage protection insurance usually pays an agreed amount per month (e.g. £2,000)
Many flexible mortgages allow payment holidays at any time and you do not even have to tell the lender why.
Some traditional mortgages also allow payment holidays, but you usually have to have made overpayments in the past to be eligible. That means paying more than your agreed monthly payments until you have built up sufficient credit to take a break from payments.
Whether you are allowed a payment holiday depends on your lender, your mortgage deal and your circumstances.
Mortgage payment holiday conditions vary from lender to lender, but typically rules include:
The length of the payment holiday you are allowed to take. The maximum is usually between 1 and 12 months.
A minimum period you have made your mortgage payments on time. This is usually 6 to 12 months.
You usually must be up to date with payments to take a holiday. But some lenders may allow a payment holiday if you have just one payment in arrears.
A maximum percentage (e.g. 80% LTV) of your property's value your mortgage can cover, and in some cases a payment holiday would push it above this.
To find out if you are eligible, check your mortgage terms and conditions or ask your lender.
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 3-month holiday, the interest over the 3 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 9 months), your total repayments would be approximately £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.
In simple terms, there is not 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.
The only time to consider taking a mortgage payment holiday is when you are struggling to meet your monthly payments.
Last year, just a week before the UK went into lockdown, Sara was made redundant by her employer. On her last day at work she was offered a job as an Events Manager, and she was scheduled to start in April.
But a week into lockdown, the new employer informed her that they would have to rescind the job offer as events were no longer being held because of the Covid-19 pandemic:
"My first thought was 'how am I going to pay the mortgage?' Because I'd been made redundant by my previous employer for reasons unrelated to Covid-19, I didn't qualify for the Furlough Scheme.
"Luckily, the government announced that all banks and mortgage providers would offer mortgage payment holidays to anyone who needed one. I was hesitant at first, but I called up Natwest - my mortgage provider - and asked how the payment holiday would work. They explained the process, including how it would affect my mortgage payments in future.
"I explained my situation and within 10 mins, I had a mortgage payment holiday setup for three months. It gave me just enough breathing room to find a new job without having to worry about my mortgage payments. I was fortunate, and before the end of the third month, I had a new job and I was able to pick up with my mortgage payments where I'd left off.
"In hindsight, I'm glad I did it, but I'm also nervous about how it may have impacted me in the long term. I've read anecdotal accounts of lenders rejecting people for having payment holidays in their history."
The coronavirus pandemic is one reason why many homeowners have had to consider a mortgage payment holiday this year.
The pandemic has caused immense financial difficulties for many, leaving numerous homeowners struggling to pay their mortgages.
The Financial Conduct Authority (FCA) proposed extended support for people affected in this way in March 2020 and offered homeowners who needed it, the chance to take up a 3 or 6-month mortgage payment holiday with their lender.
Happily, the UK government has agreed to extend the mortgage payment holiday scheme.
So, borrowers who have not taken a mortgage break so far are able to request a 3-month mortgage payment holiday from now until 31 March 2021, with the option to extend the payment holiday to 6 months, should they need it.
Borrowers who had already taken up a 3-month payment holiday can apply for a further 3-month deferral. Those who have already taken a 6-month mortgage payment holiday, however, are not eligible to apply.
The holiday will not appear on your credit file and won’t affect your credit score, however lenders will still be able to find out about it.
If you need to find out how to apply for a mortgage break, get in touch with your lender.
Importantly, borrowers who take up the mortgage payment holidays will not have these payment deferrals reported as ‘missing’ from their credit files, so this will not affect your ability to get credit in the future.
The FCA is also planning to continue its ban on repossessions until 31 January 2021.
If you’re a borrower who is not eligible to take up a mortgage payment holiday, but you are still struggling to make payments, don’t panic. Speak to your lender, who will be able to offer tailored support for your individual situation.
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 could include:
Increasing your mortgage term (e.g. from 20 to 25 years) brings down your monthly payments. But taking longer to pay off your mortgage means it costs you more overall.
Converting to an interest-only mortgage brings down your monthly payments. But you have to find a way to pay off your mortgage balance at the end of its term.
However, be aware that the FCA has recommended that lenders report any further support (such as additional payment deferrals on top of the 6 months’ of payment holidays) to the credit agencies, so this may have an impact on your ability to get credit in the future.
A mortgage payment holiday should be considered a last resort. If at all possible, you should try to maintain your mortgage payments, and keep your lender informed if you’re experiencing financial difficulties.
Try to save money in other areas, allowing you to keep up your payments. Putting together a household budget is a simple way to make sure you stay on top of your finances and can help you to identify ways to save cash.