A second lockdown means that many people will see their incomes fall or lose their jobs altogether – raising fears about not being able to pay their mortgage in the months to come.
According to research by the Joseph Rowntree Foundation, 1.6m households are worried they’ll miss a mortgage payment this winter.
The Financial Conduct Authority (FCA), which regulates financial companies, is proposing that the mortgage payment holiday scheme should be extended to help those in need. It will publish its final guidance soon after the comment period closes on 5 November.
The deadline for requesting a payment holiday was originally 31 October, but following the government’s announcement that there will be a new lockdown until 2 December, the scheme is expected to continue.
The FCA has proposed that borrowers who have been financially affected by coronavirus and are yet to take a break from their mortgage payments will be able to request a payment holiday lasting up to six months. Borrowers would have up to 31 January 2021 to request a payment holiday.
Homeowners who are already on a payment holiday will be allowed to extend their break for a further three months. Those who have resumed their repayments after taking an initial payment break will be eligible to take another payment holiday if they need to, lasting up to three months.
Some borrowers won’t be eligible for a mortgage payment holiday. This includes those who’ve already had six months of payment deferrals and anyone who has already agreed alternative tailored support with their lender. Under the FCA’s proposals, no borrower canreceive more than two payment deferrals of up to six months in total, even where one or both of these are shorter than three months.
If you think you qualify and need a payment holiday, don’t contact your lender just yet – they will soon provide further information on how you can apply when they have more clarity from the FCA.
Bear in mind that 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 £690. If you took a six-month payment holiday, your monthly payment after the payment holiday ends would rise by £15 a month, to £705. Over a year, you’d pay £180 more if you take a payment holiday. Bear in mind this is only an estimate, so check with your lender to see how much a payment holiday could cost you.
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 that 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?
No, but beware…
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 actual credit score held at the credit bureaus such as Equifax and Experian.
That said, although your credit score won’t be directly affected by taking a payment holiday, you may still 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 or a loan and not just your credit score.
If you’ve taken a break from mortgage payments, lenders will still be able to see this and may be more nervous about lending to you in the future. So whilst a mortgage payment holiday might provide essential breathing room, it isn’t something that should be entered into lightly.
If you do plan to take a mortgage payment holiday, 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 have a direct impact on your credit score too.
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 happens when my payment holiday ends?
The FCA has 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.
Find our more in our article What happens when my payment holiday ends?
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 to ban evictions during the first lockdown, but this suspension ended on 20 September. A ban on the repossession of homes ended on 31 October. There are calls for these bans to be reinstated to protect those renting, so there may be an announcement on this shortly. If your landlord does want to evict you, in most cases they must give you six months’ notice. Find out more about your options if you’re having problems with your rented home here.
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 join the money conversation on the community or leave a comment below.