Mortgage holidays – everything you need to know
We look at the mortgage holidays being offered by banks in response to the coronavirus, including the pros and cons, how to apply and what else you need to consider
The coronavirus pandemic has left many of us faced with a significant loss of income. You might be self employed and unable to work due to illness, isolation or current rules on social distancing, or perhaps employed in a business that is likely to see a hit to revenue putting your job at risk.
On Tuesday 17 March, the government responded by announcing that all homeowners can claim a three month “holiday” from their monthly mortgage repayments. This was extended (on 22 May 2020) by three months to the end of October 2020.
How does a mortgage holiday work?
A mortgage holiday is when your mortgage payments are paused for a period a time.
A mortgage holiday doesn’t mean your lender will cover the cost of your mortgage or simply wipe away three months worth of mortgage payments. They are not paying your mortgage for you.
Instead, they will be allowing you to defer the payments to a later date in the future. This means you will see an increase in future payments.
But different lenders may operate differently. So it will be important that you speak to your lender about what impact a mortgage holiday will have on the length of your mortgage term and future payments, as well as other options open to you.
The aim of the mortgage holiday scheme at this time is to help people who are struggling to meet their mortgage payments.
Are mortgage holidays popular?
Yes. More than 1.8 million homeowners have taken a three-month mortgage holiday since the scheme was announced in March to help borrowers in financial difficulty because of the coronavirus crisis, according to Treasury figures. That’s almost one in six of all mortgages in the UK.
Would I qualify for a mortgage holiday?
Mortgage payment holidays up to end October are available to all homeowners who are up to date on their mortgage payments.
This includes buy-to-let landlords whose tenants have been financially affected by the coronavirus. Landlords who take payment holidays are expected to pass on this relief to their tenants.
If you are a homeowner and in arrears with your mortgage, we recommend contacting your lender as soon as possible so they can review your position and discuss your options.
How do I apply for a mortgage holiday?
Speak to your mortgage lender. We would recommend applying online. We have had quite a few homeowners stuck on the phone for long periods of time trying to get through to their lender.
Many lenders need around 10 days notice before the mortgage holiday is applied so act now if you are struggling to meet repayments.
Please leave your experiences in the comments box below.
Will I pay more in interest if I take a mortgage holiday?
Yes. You’ll still owe the bank the same capital amount as you do now, and interest will continue to accrue on this. This means it will take you longer and cost you a little more to clear your mortgage.
Therefore it’s best to continue with your monthly repayments if you can.
How do I extend my mortgage holiday?
Lenders are expected to contact their customers whose mortgage holiday is coming to an end.
Some homeowners may be able to resume their full monthly payments, others may be able to pay a proportion of their monthly payment, or temporarily switch to an interest only mortgage, and others will opt to extend their mortgage payment holiday.
If you’re already on a three month mortgage holiday and would like to extend it to end October you should contact your mortgage lender online if you don’t hear from them shortly.
Can I make partial payments while on a mortgage holiday?
Yes. Speak to your mortgage lender who should be able to accommodate partial payments towards your mortgage.
Will a mortgage holiday impact my credit rating?
A mortgage holiday shouldn’t impact your credit rating during the coronavirus pandemic because it would be agreed in advance with your lender.
The credit reference agencies Experian, Equifax and TransUnion have confirmed that homeowners will have their credit scores protected when they take out a mortgage payment holiday. Your credit score will be maintained at their current level for the duration of the payment holiday.
Will my mortgage holiday be applied automatically?
No. Not everyone will want to take a mortgage holiday so banks can’t just apply them across the board.
Plus a mortgage holiday may not be the most suitable way to help every customer.
You will want to speak to your lender to talk through how mortgage holidays work and whether it is best for you.
Can I get a mortgage holiday for my buy-to-let mortgage?
Yes, the government announced that Buy-to-Let mortgage holders are also able to apply for a mortgage holiday.
What are the alternatives to a mortgage holiday?
- Remortgaging. Don’t forget that many people can save a lot of money off their monthly repayments by simply remortgaging. The UK base rate very recently reduced from 0.75% to 0.25% – the lowest rate for hundreds of years. That means if you’re on a tracker or variable rate mortgage you could see a reduction in your monthly payment as the rate cut feeds through. Fixed rates are already available at extremely low rates and could offer the chance to lock in whilst interest rates are so low.
- Switching to an interest-only mortgage. Many banks have said they would let customers switch to an interest-only mortgage to make monthly repayments more affordable. This could be a temporary switch.
- Extending your mortgage term which in turn will reduce your monthly payments.
- Making partial payments. Everyone’s circumstances will be different, so when homeowners can pay some or all of their mortgage, the government has advised they should work with their lender on a plan
Mortgage holidays are not a long term solution
The banks admit the payment holidays are not a long-term solution but are designed only for a temporary shortfall in income. “This is not a solution where, because of a permanent reduction in income, a borrower is unable to afford anywhere near the full mortgage repayments and there is little prospect of an improvement in the situation in the foreseeable future,” said UK Finance.
Latest government advice states that “Where consumers can afford to re-start mortgage payments, it is in their best interests to do so”.
The government have said that borrowers that resume with their mortgage payments will be given options on how best to do so, such as the opportunity to extend the term of their mortgage in order to leave their monthly payments at around the same level as they were prior to their mortgage holiday.