Mortgage holidays explained

The current mortgage payment holidays were introduced on 19 March 2020 by the government to help borrowers who were struggling to pay their mortgage due to coronavirus. 

With so many people being furloughed or losing their job, the payment holiday acts as a stop gap while they get back on their feet.

What is a mortgage holiday?

A mortgage holiday is where you temporarily stop paying your monthly mortgage for a set number of months. It is also known as a payment deferral and must be repaid at a later date.

Another option is a partial payment holiday where your lender will allow you to make reduced payments.

The Financial Conduct Authority (FCA) has confirmed that homeowners whose finances have been affected by COVID-19 can apply for a 3-month mortgage payment holiday, which can be ‘topped up’ to a total of 6 months. 

Homeowners unable to make their mortgage payments who have yet to apply for a payment holiday have until 31 March 2021 to do so. The holiday will not appear on your credit file and won’t affect your credit score, however lenders will still be able to find out about it. 

You should only take a mortgage payment holiday if you really need to. This is not free money – it is simply extending the term of your mortgage by 3-6 months. Your home loan will continue to build up interest during this time, meaning the total amount you will pay back over the term of your mortgage will be higher.

What is the advantage of a mortgage holiday?

If you are struggling financially due to loss of income or less money coming in, a mortgage holiday gives you some breathing space. 

What is the disadvantage of a mortgage holiday?

Taking a mortgage holiday means you will owe more in the long run. The way a capital and repayment mortgage works is that each month the amount you owe gets lower as you pay down the mortgage. But if you take a month off the amount owed does not reduce, it goes up because interest is added.

Can landlords apply for a mortgage holiday?

Residential buy-to-let landlords who have tenants struggling to pay their rent due to coronavirus can apply for a mortgage holiday.

Should I apply for a mortgage holiday?

You should only consider a mortgage holiday if you really can’t afford to make the monthly payments.

Should I cancel my direct debit?

No, do not cancel your direct debit until your lender has agreed to the mortgage holiday. If you do, it will be regarded as missing a payment and recorded as a default on your credit record. This will damage your credit score and your ability to remortgage or take out further credit.

Will a mortgage holiday affect my credit score?

The Financial Conduct Authority (FCA), which regulates the financial services industry, has said that payment holidays under the current coronavirus circumstances should not impact on a person’s credit score. However, lenders do have other ways to check affordability and whether you have taken a mortgage holiday.

After taking a mortgage holiday and you are back on track with your payments, it is worth checking your credit file to make sure it is correct. If it is not, you should contact your lender to put it right.

If you cannot make payments at the end of the mortgage holiday, that will show up on your credit file and will stay there for 6 years.

How to apply for mortgage holiday

If you want to take a mortgage holiday, you must contact your lender and explain why you need one. Since the coronavirus pandemic started, lenders are obliged to grant a mortgage payment holiday if your finances have been impacted due to Covid-19.

Many lenders have set up online applications for a mortgage holiday so check your lender’s website to see if they have that facility in place. 

You can contact your lender by telephone but bear in mind that lenders are very busy dealing with mortgage holidays and you may have to wait. More staff are being trained to cope with the demand and many are working from home.

If your lender has a high street presence you may be able to visit the branch but you might need an appointment.

Can I cancel a mortgage holiday?

You can cancel a mortgage holiday at any time by letting your lender know you wish to do so. You may be able to do it online, otherwise you should phone your lender or possibly visit a branch.

Can I get a payment holiday if I am in mortgage arrears?

You are not usually eligible for a mortgage holiday if you are in arrears. But, at the moment, because of coronavirus, you can apply for a mortgage holiday for up to 3 months. You have until 31 March 2021 to do this. You will need to discuss this with your lender as building up even more arrears might not be the best option.

Can I remortgage during a payment holiday?

You should be able to remortgage with your current lender but it is unlikely you can move to another lender.

If you have been furloughed you should still be able to remortgage, although most lenders will take into account your furloughed wage.

What happens at the end of the mortgage holiday?

Your lender will contact you to make arrangements for repaying the mortgage. This is likely to be a letter stating your current balance, new monthly payment and when the next payment is due. Contact your lender if the new payment is difficult for you.

There are a number of options:

  • Increase the monthly repayment, which will keep you on track to repay the full amount on the date originally planned

  • Extend the mortgage term which means you will take longer to repay the mortgage. For example, if you have 10 years left to pay, this could be extended by a few months to keep your monthly payment the same or lower than it was prior to the mortgage holiday. Be aware that by extending the mortgage term you will end up paying more overall due to interest

  • Your lender may have other ways to restructure your repayment plan

  • If you cannot make payments your lender can inform you of free debt advice services or even refer you on to one

Your lender must explain to you the implications of any proposed arrangements such as the impact on your overall mortgage balance and credit file. 

At the end of your mortgage holiday, if you are unable to make payments or can only make partial payments, this will be recorded on your credit file. This will have an effect on your ability to get credit in the future such as taking out a loan, credit card or remortgaging.

Other options for changing mortgage payments

If your financial circumstances change for the better, you could consider paying more money into your mortgage. With savings rates so low, one option is to pay off some of your mortgage if you can afford to, rather than putting your money in a savings account paying next to nothing.

Many lenders allow you to increase your monthly payments. This will reduce the mortgage term, meaning you pay off the mortgage more quickly. 

You could also pay a lump sum to reduce the amount of money owed on the mortgage. This is usually up to 10% of the outstanding balance but some lenders allow more. 

Both of these options will bring down the mortgage term, perhaps by a number of years depending on how much you have paid off. 

But beware of early repayment charges. It is important to discuss this with your lender and find out if you will be penalised for paying off some of the mortgage.

Can my home be repossessed during a mortgage holiday?

Currently, there is a ban on lenders repossessing homes, which is due to be lifted on 31 March 2021. 

If repossession proceedings do start up again after 31 March, there will be a backlog. Any repossessions that were going through the system after 19 March 2020 were stopped due to coronavirus. The exception was if the homeowner wanted the repossession to go ahead, maybe because they had already made arrangements to move into another property.

Do all lenders have to give mortgage holidays?

Under the current coronavirus climate, technically yes, all lenders should give mortgage payment holidays if required. This applies to all lenders who are regulated by the FCA. 

Some people have their mortgage with non-regulated firms. This is usually because the mortgage has been sold by the original lender to an investor. The FCA expects these firms to abide by the rules but as they fall outside of the regulator’s guidance, they cannot enforce it. 

You can check if your lender is regulated on the FCA’s Financial Services Register.

How many people have taken a mortgage holiday?

More than 2 million mortgage holidays have been granted which is equivalent to around 1 in 7 borrowers, figures from UK Finance can reveal.

UK Finance is the trade body for the financial services industry and it confirmed that 1.7 million of those mortgage holidays were in place by the end of April 2020.

By the end of June 2020, when the initial 3 months were up, many borrowers were back paying their mortgage. More than 70% have resumed full payments, but that means almost 3 out of 10 people (30%) are still on a mortgage holiday. 

The latest figure available is from August 2020, when there were 731,000 mortgage holidays still ongoing.  

Of those people taking advantage of mortgage holidays, their average monthly payment is £755, according to UK Finance. This has been calculated by using the average interest rate of 2.37% on an average loan size of £132,128, as of 31 December 2019.

Mortgage holidays after 31 March 2021

Under normal circumstances, there are restrictions with taking a mortgage holiday. The current plan is that new mortgage holiday applications after 31 March 2021 will go back to pre-coronavirus criteria.

Eligibility for a mortgage payment holiday depends on whether your lender offers it as an option. If it does, different lenders have different criteria but they will run along similar lines.

Mortgage holidays can be taken for various reasons. These include losing your job, illness and temporarily unable to work, maternity or paternity leave.

Common criteria (timescales can vary depending on the lender):

  • You have had your mortgage for at least 12 months 

  • Your mortgage payments must be up to date 

  • You have not been in arrears in the last 12 months

  • You have not had a payment holiday in the last 12 months 

  • You have not been declined a payment holiday in the last 12 months

  • You have not extended your mortgage term within the last 12 months

  • You have not taken additional borrowing on your mortgage in the last 12 months

  • Your mortgage is less than x% of the value of your home at the end of your payment holiday (75% to 80% is standard)

  • The Department for Work and Pensions is not making payments to your mortgage

  • You live in your property and do not rent it out

  • You do not have a shared ownership mortgage

  • Your mortgage term has at least 12 months left after the payment holiday finishes

  • If you have a joint mortgage, all parties must agree to the payment deferral

8 February 2021