It’s possible to apply for a mortgage holiday until October 2020. Here’s how starting or extending one could affect your finances.
As lockdown and furlough began in March, one of the extra measures announced was a mortgage break if people needed it. This meant you could ask your mortgage provider to pause payments for up to three months.
As with other support schemes, it’s now been extended. From June 4th, if you’re already on a mortgage holiday you can request a further three months, and if you haven’t yet applied you can do so until 31st October 2020.
The rules preventing lenders from repossessing properties have also been lengthened to the same date.
What is a mortgage holiday?
Very simply it’s an agreement with your lender that you won’t pay your mortgage for a set amount of time.
Will a mortgage holiday cost me more money?
You will obviously have to pay the money back later. Though some lenders are extending mortgage lengths to reflect the break, or allowing a lump sum payment, most are just spreading the missed payments across the mortgage.
That means monthly payments will go up – though by how much does depend on the amount you owe and the length of your mortgage. For most people it’s likely to be a relatively small amount – though that could still impact your future finances.
And If you are near the end of your mortgage then you might find your remaining payments shoot up. For example if you take a six-month break but have a year left, your payments will double for those final six months.
You’ll also continue to be charged interest on the loan, so you’ll ultimately pay more money back.
There are a few calculators out there to help you estimate the additional monthly payment costs and overall additional interest, but this one from Habito has already been adapted to cover holidays of up to six months.
Will a mortgage holiday affect future credit?
The rules from the FCA on mortgage holidays say that holiday payments won’t go on your credit report. Good news.
But it’s not quite so simple. Lenders, especially when considering mortgages and remortgaging, don’t just rely on your credit report.
An MSE investigation the other week found that some lenders using Open Banking data – which could identify breaks in payments – might take any payment holidays into account.
Should you take a mortgage holiday?
So far a huge number of people have taken advantage of a payment holiday. UK Finance (the industry body) says one in six mortgage holders took a break – a total of 1.86million.
Well if you don’t have enough money to pay your mortgage then this scheme is really useful. With 25% of the workforce currently on furlough, and many self-employed people unable to claim any government support cashflow is obviously going to be a problem for many. This can really help.
But since interest will continue to be added to your debt it makes sense to pay it each month, or at least come to an agreement for part payment, if you can.
Plus, don’t forget it’s uncertain just how many people could find remortgaging more difficult as a result of any payment breaks. So not taking one or limiting it to just the months you don’t have the cash could help you get better deals later on.
There are also a couple of alternatives to consider. You could see if the bank will move you to an interest-only mortgage where you just clear the interest. This could be helpful in the short term.
Or if you’ve overpaid in the past your lender might be open to reducing payments for a while. It’s worth asking.
How to apply for a mortgage holiday
It’s vital that you apply for and agree a mortgage holiday with your bank rather than just stop paying. So don’t just stop your standing order / Direct Debit. That will hurt your credit report and put you in arrears.
Every bank and lender will have a slightly different process, so it’s best to check direct with them. You’ll find most will let you do it online too – which will make things much easier.
Mortgage holidays are in theory only available to people who have been hit financially by the pandemic, but you are able to self-certify that this is the case.
Before you apply for the break, make sure you find out
- How you’ll be expected to pay the missed payments
- What the total cost will be
- If you can make interest-only or reduced payments instead
It’s interesting that all advice is “It’s vital that you apply for and agree a mortgage holiday with your bank rather than just stop paying”.
Logical of course, but if you can’t pay you simply can’t pay – and THAT is why you need the break in the first place. Add to this that some lenders are extremely sluggish in responding (if they even do at all) that it becomes a minefield of stress.
Then add to this that the 2nd SEISS payment for self-employed will not be monthly, but another lump sum around August leaving a 3-month gap, then it becomes almost impossible to avoid having to extend the mortgage payment break if you needed it in the first place.