Over recent months, the government has introduced several unprecedented measures to support households through the Covid-19 pandemic. You have most likely benefited from some of these initiatives. If you’ve not been on furlough or enjoyed a half-price pub meal, you may have taken advantage of a mortgage payment holiday.
This scheme initially allowed you to take a three-month break from your mortgage payments and was extended by a further three months in May. Now the Financial Conduct Authority (FCA) has confirmed that the application window for automatic mortgage payment holidays will end on 31st October.
If you’ve previously applied for a payment holiday or have been thinking about applying for one before the scheme closes, there are several long-term consequences you should be aware of.
The government introduced mortgage payment holidays to support households struggling to meet their mortgage commitments during the Covid-19 pandemic. A three-month break from payments was designed to support borrowers experiencing an unexpected loss of income during the pandemic.
The scheme is available to all homeowners whose mortgage payments are up to date, and to Buy to Let landlords whose tenants have been financially affected by Covid-19. As the application process has no qualifying criteria, and lenders don’t require any evidence or an affordability test, if you want to take a payment holiday you simply contact your lender and they will approve your application.
Due to widespread financial uncertainty, the scheme has proved incredibly popular. As early as April, the BBC reported that 1.2 million people had signed up to the scheme. Its popularity grew even more when the deadline for applications was extended until October and, by July, the BBC reported that almost two million people were now taking a payment holiday – almost one in six mortgage holders in the UK.
Once the scheme begins to wind down on October 31st, existing holidays will continue until the end of their three-month period. However, you won’t be able to automatically renew your payment holiday or apply for your first one. So, if you want to apply, make sure you do so before the closing date.
If you’ve taken a mortgage payment holiday, you may not have paid your mortgage for six months this year. During this time, you may have reduced your expenses by a significant amount. You can figure out exactly how much you have saved by multiplying your usual mortgage payment by the number of months your mortgage payment holiday has lasted.
For example, if you had a £150,000 repayment mortgage with 20 years left to run on an interest rate of 2.5%, your pre-holiday mortgage repayments would have been around £795 per month.
So, during a three-month payment holiday, you would have reduced your expenses by £2,385, or by £4,770 if you had taken a six-month holiday.
However, it’s important to understand the full consequences a mortgage payment holiday could have. Although you reduce your living expenses for the duration of your payment holiday, you'll still need to make your payments later. You are most likely to do this by spreading the costs of your deferred payments across the remaining lifespan of your mortgage, resulting in higher monthly payments.
This means that you may well end up paying more than you would have done had you not taken the payment holiday. This is due to the interest you will still accrue during the time you're not making payments.
You can use an online payment holiday calculator to work out what your future payments will be, and the additional expenses you’ve accrued.
For example, using the £150,000 mortgage example mentioned above, after a three-month payment holiday, your repayments would likely rise from around £795 to around £808 - an increase of £13 per month.
This is an additional £3,120 paid over the lifetime of your mortgage. So, despite your short-term savings of £2,385 from a three-month break, you end up paying £735 more overall. For a six-month holiday, the difference is even greater.
Taking a mortgage payment holiday could also affect your chances of having a new mortgage approved.
When the scheme was first introduced, the FCA assured borrowers that taking a mortgage holiday wouldn't have a negative effect on your credit rating. Credit reference agencies confirmed that the payments you didn't make during a payment holiday wouldn’t be marked as missed payments on your credit file.
However, although your credit rating may not be affected, remember that lenders take several factors other than your credit score into account when deciding whether to approve a mortgage application.
They can take into account changes to your income or expenditure, such as if you've been furloughed or temporarily stopped paying your mortgage. They may also consider increased debt, like the additional interest accrued during your payment holiday.
Knowing about your payment holiday could make lenders nervous, and therefore reduce your chances of securing a loan. Lenders may fear that by not keeping up with your mortgage payments you've proved that you do not have a sufficient financial safety net in place and are therefore more likely to struggle to repay your loan in the future.
Because of these potential difficulties you should carefully consider your options before applying for a mortgage payment holiday. If you haven't yet applied for one, only do so if absolutely necessary.
If you've taken a mortgage payment holiday and are now thinking of moving house or remortgaging, we may be able to help you. Call us on 03300 583 859 to receive free mortgage advice.
Please note: Your home may be repossessed if you do not keep up repayments on a mortgage or other loans secured on it.