The end of July sees the final closure of the government’s mortgage holiday scheme, which was introduced last March as the first national lockdown and furlough started to take their toll on household finances. It allowed struggling homeowners to claim a mortgage payment “holiday” from their lender for up to six months.
The scheme was closed to new applications from March 31, although those who had started their first payment holiday before that date were able to extend it up to July 31.
What is a Mortgage Holiday?
Mortgage holidays are simply an opportunity to take a break from monthly repayments. It doesn’t mean your lender will pick up the tab or write off those payments, but they do allow you to defer payments for a few months.
Crucially, not only will that money still have to be repaid later in the mortgage term – so will the additional interest that accrued on it during the holiday, so it will cost you a bit more overall.
However, as Mark Harris, chief executive of mortgage broker SPF Private Clients, points out: “Most lenders will allow borrowers to make a lump sum overpayment, or regular overpayments to return themselves to their original situation.”
Of course, the end of the government scheme does not necessarily mean everyone’s circumstances have improved even to the point where they can resume previous monthly payments, let alone taking on overpayments.
So what are the options if you’re finding it difficult to meet normal mortgage payments, whether that’s following the end of your six-month mortgage holiday, because your financial situation has recently deteriorated (due to redundancy, perhaps), or because you’re facing an unexpected expense such as a boiler to replace?
What are My Options?
Harris explains that "tailored support" is available. “If you are struggling to pay your mortgage, you should engage with your lender as soon as possible,” he stresses.
Under government guidance, lenders will offer tailored support to anyone finding it hard to keep up with payments, whether or not they have already had their allocated six months of payment holiday.
The lender may agree to a payment deferral, or might offer you the option of reduced payments for a set period of time. Alternatively, the lender may change the structure of your mortgage, for example by lengthening the term, changing the repayment strategy to an interest-only arrangement, or even switching the product itself.
More generally, you may be able to plan a mortgage payment holiday to coincide with a particular big event that is likely to impact on your finances, such as having a baby and taking maternity or paternity leave.
Not all lenders allow these breaks or reductions in mortgage payments, and it will also depend on the terms of your individual contract. Speak to the lender in advance: even if it does offer the facility to take a payment holiday, there will be eligibility criteria and these will vary between lenders.
In many cases, you’ll need to overpay your mortgage beforehand - effectively building up credit to cover the holiday period. If you don’t do that, a new, higher monthly repayment amount will be calculated and charged when you resume payments. We have previously looked at whether it makes sense to pay off your mortgage early.
“Do discuss your situation with the lender,” advises Harris. “Depending on the reason for the holiday – short term cash-flow issues, or maybe longer term income/employment issues – they will look to help and find the most suitable outcome for you.”
Pros and Cons of Mortgage Holidays
Of course, there are pros and cons to any deferred payment arrangement, and some people have also taken a pension holiday through the Covid-19 crisis. Tailored support could enable you to remain in your home during a difficult period – a particularly important consideration, given that property prices are currently so buoyant and homes are in such short supply. A planned mortgage holiday, meanwhile, can ease the financial pressure for a while when you have other big things going on.
But there is always a cost. “With shorter-term measures [such as a temporary holiday or underpayment], any unpaid debt is rolled up and added to the overall mortgage balance. This will result in higher payments as and when they resume, unless you arrange with the lender to make overpayments,” explains Harris.
If the mortgage contract is changed and the debt restructured to reduce the monthly payment – for example, by arranging a longer mortgage term – it’s going to cost you more in interest because the capital outstanding is being paid off more slowly. Here are some tips for how to choose the right mortgage for you.
Another solution may be for all or part of the debt to be transferred either temporarily or permanently to an interest-only set-up. If it’s a permanent transfer, there will be an outstanding portion of capital left unpaid at the end of the mortgage term.
Moreover, Harris adds, any action could affect your credit rating. “The regulator has stipulated that lenders report the tailored support they provide to credit reference agencies, so this will go on your credit record," he says. "This will have an impact on your creditworthiness further down the line, and may result in higher-rate products as you are deemed to be higher-risk.”
The bottom line is that you’ll always be better off repaying at least some of your mortgage if you’re able to, because it will help to keep down the cost of total repayments over the long run.
