During this difficult time, we have all been making decisions based on what is best for us going forward. One of these decisions maybe whether to take a ‘payment holiday’ on your mortgage.
There is no doubt that 2020 was a tough year for most and it looks like 2021 may be walking a similar path. So, is it the year you will decide to take a payment holiday on your mortgage?
Here at Mortgage Squared we want to give you the low down on payment holidays so you can make the right decision.
What is a payment holiday?
To be clear from the get-go the correct term for a payment holiday is ‘deferring the interest’.
For the purpose of this article, we will stick to payment holiday, as not to confuse anyone.
Payment holidays were introduced at the beginning of the pandemic in March. They were then extended in June because people’s income had dropped or ceased altogether.
Mortgage payment holiday’s provide flexibility in repaying the mortgage by allowing borrowers to stop or reduce their monthly payments. This was for up to three months. To be clear, you do not have to pay the mortgage repayments for this period. However, interest will still accrue while the borrowers are on the payment holiday, which will mean borrowers owe more once they start to repay again.
This was a safety net that provided much needed support to borrowers who required it most. NOT to be confused with being handed a break from paying your mortgage.
Can you take a payment holiday at any time?
If you call up your mortgage provider and request a payment holiday without Covid related reasons, then there are very different rules. You will need to discuss this further with your provider.
How do you apply for a payment holiday?
To be able to apply, you need to contact your lender and explain how the pandemic is affecting your ability to pay your mortgage repayments. Some lenders allow you to this online. Always research the best way to apply online.
Most applications are fast tracked, and you will not need to provide evidence or have an affordability test which allows you to get a quick decision.
You must understand before taking out a payment holiday is that ANY unpaid interest will still need to be paid back. There will be no additional fees or charges attached.
The lender will go through any sums covered by a payment holiday, any increases in the monthly repayments and any increases in the total amount payable under the contract of the mortgage once its ended.
Before accepting the payment holiday terms the lender should explain any impact on the monthly payments. They should also discuss any alternative ways of repaying the mortgage, if this option is more suitable for you.
If you are currently behind on repaying your mortgage this does not exclude you from applying if this is going to help you moving forward with repaying the payments.
You are able to apply for another three months IF this is best course of action for you.
If taking a payment holiday seems to be the best option you have, be aware that deadline for the current wave of payment holidays is 31st March 2021.
Will it affect the mortgage payments?
Repayments will increase after the payment holiday ends. The shorter the term left on the mortgage, the larger the increase to the monthly payments. Therefore, before taking out a payment holiday people should think very carefully. Consider whether restarting payments at a higher amount will affect your financial situation even more so.
There is the option to take partial payments holidays too. If payments are made towards your mortgage, but you cannot pay the whole amount, the lender will be able to come to an agreement with you and your circumstances.
By doing this, less interest will accrue. This means future repayments would be lower than if they had taken a full payment holiday.
The lenders should contact you towards the end of their initial mortgage deferral to discuss the next step. Whether this is starting to repay in full, in part, or an extension of the mortgage holiday. If the lender can’t contact, you it may assume the payments can be restarted.
Please remember – if you are still being impacted by Covid at the end of the period it is best to be completely honest with the lender.
Are they missed payments?
When setting up the initial payment holiday agreement this will not be marked as missed payments on credit reports.
For example – the balance of any credit commitments won’t decrease as otherwise would, during the agreed payment deferral period. This is something that any potential creditor will be able to see this.
Please be aware when the payment holiday ends, and you are unable to pay, the mortgage lender can repossess your home. This would be the very last resort if all other avenues had been exhausted.
If it is possible to make interest-only or capital repayments during your mortgage holiday, then this will go in your favour. It will reduce any increase in your monthly repayments. Please note you will still need to pay back whatever does accrue, in your normal monthly payments.
Where consumers need further short-term support, mortgage lenders can continue to offer arrangements for no or reduced payments for a specified period. This additional guidance came into force on 16 September 2020.
Where borrowers have taken, or are taking, payment deferrals under the existing guidance and require further support from mortgage lenders these further arrangements can be reflected on credit files in accordance with normal reporting processes.
This also applies to borrowers newly affected by coronavirus who receive support from their mortgage lender after 31 October.
The FCA has published additional guidance for mortgage lenders. https://www.fca.org.uk/consumers/mortgages-coronavirus-consumers#payment-holidays
Lenders are supporting their customers throughout the period of difficulties and uncertainties. They recognise vulnerability and are responding to the particular needs of these customers.
In 2021 there are clearer guidelines and advice, adequately trained staff, and systems in place to better the customer journey. Payment holiday / deferring the interest is something that people need to know ALL the ins and outs before they go ahead.
Mortgage Squared are behind their customers 100%. They want to give the best advice that will be of help through the pandemic. We want to make sure that you know EXCATLY what you are doing when it comes to payment holidays. WE are always here to answer any questions that you may have.
Please give us a call on 08081 551 807 to have a chat with one of our friendly advisors.
Please note – Your home or property may be repossessed if you do not keep up with repayments on your mortgage.