What is a mortgage payment holiday and how does it work?
As households continue to feel the financial strain of COVID, the extended mortgage payment holiday is likely to be welcome news for many.
By Louisa Fletcher, property expert
According to recent research by the industry body UK Finance 1, which represents the majority of mortgage lenders in the UK, more than 1.6 million mortgage payment holidays have been offered to borrowers so far in 2020.
This means that one in seven mortgages in the UK is now subject to a mortgage payment holiday, with almost 700,000 payment holidays granted in April alone.
For many, the ability to take a break from paying their mortgage for a few months could be an invaluable lifeline. But what exactly does this mean for borrowers in both the short and long term?
What is a mortgage payment holiday?
Simply put, a mortgage payment holiday is a formal agreement with your lender to waive your mortgage payments for a specific amount of time meaning you won't make any payments during that time.
It’s important to know that you do still have to pay the money back at some point. The capital amount that’s outstanding is added to the overall amount you owe, and interest is recalculated accordingly. You’ll still owe the same capital amount at the end of the payment holiday, as you’ve not been reducing the outstanding amount, and you’ll also pay additional amount of interest overall.
Some lenders allow you to extend the overall term of your mortgage to accommodate the missed payments, others may allow you to increase your monthly payments when you go back to making them in order to pay down the outstanding amount, providing you meet their criteria.
As all lenders have different terms and conditions for putting mortgage payment holidays in place, you’ll need to speak to your mortgage provider to understand what would apply in your individual circumstances.
One caveat that will apply regardless is you need to be up to date on your mortgage payments in order to apply for a holiday.
Will taking a mortgage payment holiday affect my credit rating?
Some consumers are concerned that taking a mortgage payment holiday may negatively impact their credit rating. But that’s not the case, and this misconception could prevent those who'd benefit from asking for financial assistance when they need it the most.
Providing that your mortgage payment holiday is formally agreed with your mortgage lender, and you stick to the terms of the agreement put in place, there will be no ‘black mark’ on your credit rating, and it shouldn't impact any future mortgage applications. If you’re in any doubt, ask your mortgage lender to confirm in writing that your credit rating won’t be affected, so that you have a record of it should you need at a later date.
I need to remortgage soon but also need to arrange a payment holiday – can I do both?
The good news is, providing you're up to date with your mortgage payments then yes, it’s highly likely your lender will allow you to do so. The UK lending industry announced in April additional measures to help homeowners who have taken payment holidays, but who also need to remortgage. The scheme allows for a product transfer to proceed while a mortgage payment holiday is in place, something that wasn’t possible before.
A product transfer means that you simply switch the same amount of borrowing you currently have on your existing mortgage that’s due to expire across to a new deal with the same lender. Because product transfers are ‘like for like’ mortgages, they generally don’t require a full affordability assessment. This means that borrowers who've been furloughed are still eligible to apply.
That said, product transfers don’t allow you to switch to a different lender or increase your amount of borrowing; either of these would be classed as a remortgage, which requires a full application and affordability assessment.
Can I take an insurance payment holiday?
If you’re struggling financially, you may be able to approach your insurer to agree on a payment holiday on your policies. If you’ve got a mortgage it'll be part of your lender’s terms and conditions to have buildings insurance in place, so you can’t just cancel it.
If you’re an Aviva customer, you’re in luck. We were the first major insurer to offer car and home insurance payment holidays for people affected by COVID-19, so you can benefit from cover being in place while you suspend your payments for a few months.
Similar to a mortgage payment holiday, you’ll need to formally agree to this – so don’t just cancel the direct debit – and you'll have to repay the monthly premiums owed at a later date. You can find out if you could be eligible for a payment holiday here.
How do I arrange a mortgage payment holiday?
If you think that taking a mortgage payment holiday might help you to keep your finances on track during this difficult time, the first thing you should do is contact your lender. Some banks and building societies have even added an ‘apply online’ facility to help streamline the process and make it as straightforward as possible.
One last word of advice – don’t cancel your direct debit to your mortgage lender until everything is confirmed in writing. Missing a mortgage payment without the prior agreement of your lender is classed as mortgage arrears, which creates an issue with your credit rating and future mortgage applications.
Having said that, the processes are in place to help those who need it, and given the scale of the current challenges, no one should feel embarrassed to ask for help.