The question of whether or not you should take a mortgage payment holiday is tricky to answer in general terms. Some people see them as a helpful means of temporarily relaxing your monthly spending when you need some breathing room, whereas others see them as more trouble than they’re worth.

As with any matter covered here at IMC, the exact answer depends on your specific circumstances and requirements. In this post, we’re looking at the pros and cons of taking a payment holiday on your mortgage and explore whether or not you should request one before you rush into a decision.

What is a mortgage payment holiday?

A mortgage holiday is available under certain mortgage plans and it allows you to take a break from your monthly repayments. The length of this break can range from just one month to over 12 months, depending on your financial circumstances and the terms set out by your lender. 

Can I take a mortgage holiday?

Typically, mortgage payment holidays are only offered by lenders when:

• You have built up a sufficient amount of credit through mortgage overpayments
• You are unable to make repayments due to unforeseen expenditure (e.g. car repairs)
• You have had a change of financial circumstances (e.g. redundancy or maternity leave)

The exact circumstances in which a payment holiday will be granted depends on the type of mortgage and the mortgage lender in question. Check the terms and conditions presented by your lender and/or speak to your financial adviser before approaching them about this. (Flexible mortgages are most likely to permit breaks on repayments). The likelihood of being granted a mortgage holiday increases when you have a good history of repayments being made on time, often with no payments in arrears during the previous 12 months of your mortgage.

The pros

Be sure to read the ‘cons’ listed below before resorting to this measure so that you’re prepared for the more negative consequences.

Reducing monthly outgoings for the short term

Mortgage payment holidays are best saved for occasions where you need some short-term financial relief from your mortgage payments due to a temporary problem. Good reasons for a mortgage payment holiday include, if you’ve been made redundant. In this instance, arranging a payment holiday with your lender takes off some pressure from your monthly outgoings, until you find a new source of income. It’s one less payment to worry about in times where your cash flow is off balance. Another example that’s become very relevant is if you’ve been furloughed due to Coronavirus and are receiving a 20% reduction in salary. Similarly, when you have a reduced joint income because your partner is taking maternity or paternity leave. 

It’s better than falling into arrears

When the only perceivable alternative is going into mortgage arrears, you may be better off taking a payment holiday until you can find your feet again. Treat this as a last resort when faced with financial troubles, rather than an ‘easy way out’ of them. Make sure that you have a defined plan as to how you’ll get back on track so that you don’t end up relying on forgoing your repayments – this can’t and won’t be granted as a long term agreement.

The cons

Higher payments after your holiday 

The overall cost of taking out a mortgage payment holiday is notably high. Your mortgage repayments don’t disappear during the time you take a break from them. You’ll still have to repay the entirety of your mortgage (both capital and interest), often in the same amount of time (unless you extend the length of your mortgage). This means that the cost of your repayments in capital, end up being higher than they were before you took the repayment holiday.

Should I take a mortgage holiday?

This increased cost is usually only a few pounds per month, depending on the length of your break and the repayment plan, but this increase applies to the remainder of your mortgage. On holidays that last over a couple of months, this could leave you with some serious catching up to do! As such, if you’re taking a repayment holiday because you need some breathing space from the high costs incurred by your mortgage, consider the fact that you’ll end up with even more stressful payments in future. If you’re expecting a pay rise or a reduction in other outgoings in future, this might not be an issue. 

Increased interest

This increase in cost is also partly due to the fact that your overall mortgage balance still accrues interest during the payment holiday. This interest has to be accounted for throughout the rest of your mortgage. As the outstanding mortgage debt gets bigger during your payment holiday, so too does the amount of interest you’re charged. Depending on the length of your holiday, this factor can increase the amount of total interest paid on your mortgage by thousands of pounds over the years. Such costs are easily avoided by exploring alternative mortgage solutions with a reliable financial advisor.

Decreased credit rating

Ordinarily, your credit rating would be affected negatively when you take a payment holiday on your mortgage. Hence, you may find yourself struggling to attain credit in the future as a result. Even if you are justified in your reasoning and your lender is happy to grant you a holiday, lenders may consider the measure as a potential risk when it’s listed on your credit report.

If, however, you decide to take a holiday from mortgage payments due to COVID-19, your credit rating will remain unaffected for the duration of the pause. This has been confirmed by the three main credit reference agencies (Experian, Equifax, and TransUnion), and has been supported further by the FCA. 

Should I take a mortgage holiday?

It’s worth asking your lender about the effects the holiday arrangement will have on your credit rating because some may list mortgage holidays as arrears (as if you had missed the repayment) on your credit file. Whatever your circumstances, it’s always a good idea to speak to your financial adviser and ask your lender well in advance if you’re planning on taking a mortgage payment holiday: present them with legitimate reasons for your break, making it clear that you’re making a prior arrangement to pay. If they suspect that you’re simply missing a repayment, they’ll consider it as such on your credit report.

Should I take a mortgage holiday or not?

Yes

Whether or not this is the right solution depends on your individual circumstances. Taking a break from your mortgage repayments is most sensible when you’re in credit from previous overpayments on your mortgage. You must be confident that the holiday is only a temporary measure. Plan ahead for the extra costs that will be incurred during your break. 

No

When falling behind on your mortgage repayments, delaying those repayments isn’t a long term solution as you fall further behind. If you’re consistently unable to meet your mortgage repayments for reasons that aren’t temporary (i.e. insufficient income or long-standing debts), taking a short break isn’t the best solution – a new mortgage deal or a reduced rate would be better in the long term. In such cases, you may want to consider consulting a mortgage broker to get the best deal in accordance with your monthly income and your financial circumstances.

Mortgage debt is best avoided by taking on the best mortgage deal for you and sticking to each repayment. This has the added benefit of avoiding any extra costs from increased interest and going through a professional adviser and mortgage broker can help to achieve this. 

Mortgage holidays and coronavirus

As a result of the COVID-19 pandemic, more mortgage lenders are agreeing to offer ‘forbearance’ (tolerance and assistance) on mortgages. In most cases this means that lenders will offer mortgage payment holidays of three-months to those struggling to pay their monthly payments as a direct result of the coronavirus outbreak. 

Considerations

• This isn’t compulsory so check with your bank or financial adviser to find out if your lender is offering a break from payments
• You’ll likely have a small uplift in future payments, after your mortgage holiday

If you have any questions about how your finances could be affected by the pandemic or how best to manage them during this time, please get in touch with us. 

IMC provide expert advice covering all areas of the financial market, from mortgages and wills to insurance and and estate planning. We will provide solutions that are tailored to your individual needs and circumstances, so feel free to contact us for a professional and personalised service.