How Do Mortgage Holidays Work?

Due to the recent announcement by the UK Government, homeowners are now capable of applying for a mortgage holiday. This measure has been put in place to combat the financial impact that Coronavirus is having on many people up and down the country. While mortgage holidays have been accessible to homeowners outside of the current crisis, more and more people have needed to consider it as an option.

This has shone the spotlight on the scheme in recent weeks, so we have put together this quick guide to what a mortgage payment holiday is, and how to apply for one. Also, we will cover the potential benefits and drawbacks of taking a mortgage holiday due to Coronavirus.

About Mortgage Payment Holidays

Mortgage payment holidays allow homeowners to take a break from paying their mortgage for a temporary period. This time frame can vary from lender to lender, but perhaps the most usual type of mortgage holiday at the moment is 3 months.

Mortgage payment holidays give you more flexibility in paying your mortgage, whether that be pausing or reducing your payments. If money is tight, this can be a godsend, but is not always a good idea for everyone. If you are considering a mortgage holiday because of the effects of Coronavirus, the first thing to do is contact your lender.

You should not cancel your direct debit without speaking to them first, there is an application process that everyone has to go through. If you do cancel your DD without sorting things out with your lender, this will count as missed payments.

Am I Eligible For a Holiday?

Whether you will be eligible for a mortgage holiday depends on individual mortgage lenders and contracts, along with your financial situation. We recommend contacting your lender to discuss your individual case.

Under normal circumstances, lenders would usually only grant mortgage holidays to people who have previously overpaid. This means that only people who have built up a certain amount of credit in their mortgage payments would be allowed. However, given the current national situation, lenders are leaning towards being more lenient with their criteria.

The Application Process

So, how do you apply for a mortgage holiday? The first step is to contact your lender to discuss the feasibility of a pause or reduction to your payments. Each lender will have different options available to you, and all will have a fast-track approval process in place. This means that you will receive a decision faster than normal.

Before you agree to the holiday, your lender will inform you of any affect it will have on the total amount payable. For instance, if you choose to hold off your payments for three months, this may increase the amount of interest you have to pay. This, in turn, will increase the total amount payable for the mortgage as a whole. If a lender is not able to grant you a mortgage holiday for whatever reason, they should provide you with a selection of alternative ways for you to handle your payments if you are struggling.

Under normal circumstances, a lender would not grant you a holiday if you were already in arrears with payments. You may also usually be required to have made payments on time for 6 months prior to taking the holiday, proving your reliability. However, due to the policy set in place by the chancellor at the beginning of this crisis, many lenders will be more likely to grant you a holiday.

The lender will then inform you of how the mortgage will change post-holiday. This could be that your deferred payments will be added onto future payments, or even spread across the remainder of the mortgage, increasing each payment slightly.

Pros & Cons of Mortgage Holidays

If you are experiencing temporary financial difficulties due to the economic effects of Coronavirus, a mortgage holiday may be ideal for you. The scheme relieves pressure on your finances and gives you one less outgoing cost to worry about.

However, it is worth emphasising that mortgage holidays are only a temporary solution. When the holiday is over, payments will resume as normal, and any accumulated interest will also need to be paid. Additionally, mortgage payments are likely to be higher than they were after the end of the mortgage holiday.

This is why a mortgage payment holiday is not a complete solution to financial hardship. It is a temporary measure that is suitable for those who can support their other financial obligations with savings or equity. The scheme was initially set up for those who had been made redundant, or were taking maternity leave and could not earn during that time.

This new scheme, set up for the sole purpose of cushioning the effects of Covid-19, is designed for people who are experiencing hardships due to the current situation. This includes furloughed workers or owners of businesses that are turning over no revenue.

Need Debt Advice?

If you are still experiencing difficulties with your finances relating to your mortgage, we recommend getting free advice from Citizens Advice or StepChange Debt Charity. Additional information can be found at Money Advice Service, so we recommend you browse their mortgage arrears advice tool.

Final Notes

We hope that this article has given you an insight into how mortgage payments holidays work during the Coronavirus crisis. Here are some key points to take away from this piece:

Contact your lender before making any decisions
Do not cancel your direct debit without doing so first
Mortgage holidays are a temporary solution, and cannot solve long term financial problems
This scheme does not grant you a pass from your payments, you will still have to pay at some point
The scheme will also likely increase the total amount payable on your mortgage
Each lender will have different criteria for being eligible

For more information regarding your finances during Coronavirus, please visit the Government website.