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 apply for a payment 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 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 get 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:
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 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.
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 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.
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.
If you want to take a payment holiday because you have run into financial trouble, 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 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.
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
If you're a first time buyer or looking to move house or remortgage, we can help you find the best mortgage deal to suit your needs.