Your mortgage is likely to be your biggest monthly cost, so if your income has fallen due to the coronavirus you might be struggling to meet your repayments.
To help those financially affected by the pandemic, households who can’t afford to cover mortgage costs were originally offered a payment holiday for up to three months, giving those who applied in March when the scheme was introduced a payment break until the end of June.
The city regulator the Financial Conduct Authority (FCA) has now extended the mortgage payment holiday scheme, so that homeowners can take a further three months off payments, or start making partial payments if they’re able to. Lenders must allow homeowners who haven’t already taken a payment holiday to apply for one up until October 31. Anyone applying in October won’t have to restart their payments until January 2021.
City watchdog the Financial Conduct Authority (FCA) said that banks should continue to offer support to those who are struggling with repayments once their payment holidays end. Proposed options include extending their mortgage term, or restructuring their mortgages to make payments more manageable.
So far, more than 1.8m payment holidays have been taken by homeowners since the scheme was announced in March. However, although taking a break from your mortgage payments might be a welcome lifeline in the short run, it won’t be the right option for everyone.
Here’s what you need to know about mortgage payment holidays to help you decide if you should apply for one, or whether a different option might be more appropriate.
What is a mortgage payment holiday?
When you take a mortgage payment holiday, you don’t have to make any mortgage payments temporarily.
However, these payments aren’t simply written off. You will still owe the money, including any interest to your mortgage lender, the amount will simply get added to your total mortgage bill. This means your monthly costs at the end of the mortgage holiday will rise.
How much extra will I have to pay when my payment holiday finishes?
Most lenders will not increase the mortgage term i.e. 20 years, as a result of a mortgage holiday which means that your payments will increase over the slightly shorter term of the mortgage to cover any additional interest, as well as any repayments that weren’t made during the mortgage holiday.
The amount your monthly mortgage payments will increase will depend on your mortgage balance, mortgage term and the interest rate you’re paying.
For example, if you have a £150,000 mortgage over 20 years at an interest rate of 1.8%, your monthly mortgage payments would currently cost £745. If you took a three-month payment holiday, your monthly payment after the holiday ends would rise by £11 a month, to £756. Over a year, you’d pay £132 more if you take a payment holiday.
To help with the sums, we have a mortgage payment holiday calculator so you can work out how much your mortgage payments will increase if you take a break from your payments.
How do I arrange a mortgage payment holiday?
You’ll need to contact your lender to arrange a payment holiday.
You usually do this by getting in touch with them by phone, although some lenders allow you to request a mortgage payment holiday online. Bear in mind that lenders are currently inundated with enquiries from people worried about paying their mortgages, so expect a long wait if you’re calling and try to be patient.
Once you’ve let your lender know you want to take a payment holiday, it will usually write to confirm this will be possible within 5-7 working days. The payment holiday will then usually start from the date your next payment is due.
Will taking a mortgage payment holiday affect my credit score?
As long as you’ve managed to stay up to date with your mortgage payments so far, taking a break from paying your mortgage shouldn’t affect your credit rating – although it is worth confirming with your provider when you speak with them.
It is critical that you speak to your provider to arrange the mortgage holiday in advance as if you don’t get it approved, and simply miss a payment, then this will impact on your credit score.
Although your credit score won’t be directly affected by taking a payment holiday, you may find it harder to remortgage later on. This is because lenders will look at a wide range of factors when deciding whether to offer a mortgage and not just your credit score alone. If you’ve taken a break from mortgage payments, they may be more nervous about lending to you as you haven’t been able to keep up with your repayments, so taking a payment holiday isn’t something that should be entered into lightly.
If I don’t think I’m going to be able to make my next mortgage payment, shall I stop my direct debit to my lender?
You shouldn’t stop your mortgage direct debit until you have had confirmation from your lender that you can definitely take a mortgage payment holiday.
If you stop your payments before speaking to them, you’ll be in breach of your mortgage contract and this could affect your credit score and your ability to borrow in future. If you’re really struggling with your mortgage and other debts, seek professional advice. Charities specialising in free debt advice include StepChange, National Debtline and the Debt Advice Foundation.
Are there any alternative options to a mortgage payment holiday?
There are several other options that might be available to you if you’d rather not take a payment holiday but need to reduce your monthly payments.
Lengthening your mortgage term
One option may be to consider requesting a longer mortgage term. This will mean your monthly payments will fall, but you’ll have to make them for longer, so you’ll end up paying more interest overall.
Someone with the same £150,000 mortgage at a rate of 1.8% over 20 years would see their payments fall from £745 a month to £621 if they extended their mortgage term to 25 years, a saving of £124 a month. However, the total amount they’d pay over the term would be £186,383 made up of £150,000 capital and £36,383 in interest. If they left the term at 20 years, they’d repay a total of £178,728 made up of £150,000 capital and £28,728 in interest.
Switching to interest-only
Another option may be to consider switching your mortgage from a repayment to an interest-only basis, so you only pay back some of the interest you owe rather than any of the mortgage capital. However, if you do switch to an interest-only mortgage, you must set up a repayment plan, which usually involves paying into savings and investments, so that you’ll have cash available to pay off the capital you owe at the end of the mortgage term.
Transferring to a better deal
It’s also worth speaking to your lender to see if you might be able to move onto a different mortgage rate. If you’re currently paying your lender’s standard variable rate, you’ll usually be able to make substantial savings moving to a better deal. For example, if you have a £150,000 mortgage with 20 years left to run and you’re on an SVR of 4% your monthly payments would be £909 a month. If you were to remortgage to a two-year fixed rate at 1.8%, your monthly payments would fall to £745, a saving of £164 a month or £1,968 a year.
If you’ve made overpayments on your mortgage in recent years, you could also ask your lender if you might be able to underpay for a short period rather than take a payment holiday.
If you’re not sure which route might be best for you, you might want to seek advice from a Fee-free mortgage broker such as Fluent Mortgages or London & Country Mortgages. They should be able to talk you through the available options and let you know which lenders may be able to help.
What if I’m renting and struggling to make my payments?
Get in touch with your landlord as soon as possible and let them know you’re having financial difficulties.
They may be able to request a payment holiday for their buy-to-let mortgage until you’re able to get back on track.
The government has introduced emergency legislation to help those renting so landlords won’t be able to start eviction proceedings against tenants until they have missed more than three months of rent payments, so don’t panic that your landlord will suddenly be able to throw you out. Find out more here.
You may also be able to claim financial help from the government if your job or income have been impacted by the coronavirus. Read our article Financial support for those affected by coronavirus to find out more.
Have you contacted your mortgage lender to take a mortgage payment holiday, or are you looking at other ways to reduce your mortgage costs? You can get in touch via [email protected] or leave a comment below.