Recent research suggests that more than 2 million UK home owners are considering taking mortgage payment holidays. But what is a mortgage payment holiday, how do you take one and what are the potential pitfalls? We explain all you need to know.
What is a mortgage payment holiday?
Essentially, a mortgage payment holiday is an agreement you can make with your lender that allows you to temporarily stop or reduce your monthly mortgage repayments.
Whether you are eligible to take a payment holiday, for how long and the conditions you must meet first will depend on your mortgage deal and your circumstances.
For instance, many flexible mortgages allow payment holidays at any time, and you don't even have to tell the lender why.
Some traditional mortgages also allow payment holidays, but many will insist that you make overpayments before you are eligible. That means paying more than your agreed monthly payments until you have built up sufficient credit to take a break from payments.
Lenders may also offer home owners the chance to reduce or suspend mortgage payments if they are struggling to meet the monthly cost, for instance following redundancy. This is usually at the discretion of the lender, however, around 70% have signed up to a scheme that will enable people in financial difficulty to take a holiday of up to two years from making mortgage interest payments - the scheme is underwritten by the government.
Find out if you are eligible - check your mortgage terms and conditions.
What other conditions might I need to comply with?
Mortgage payment holiday conditions vary greatly from lender to lender, but some typical rules include:
The length of your payment holiday depends on the lender. Holidays range from 12 months to a maximum of six months over the life of the mortgage
Usually, you will need to have made payments on time for a minimum period (usually between six months and one year) before you are eligible
In most cases, you must be up to date with payments before you are allowed to take a holiday. Some lenders may allow a payment holiday if you are no more than one payment in arrears
You might not be able to take a holiday if your mortgage as a percentage of the value of your home (loan-to-value) exceeds the lender's criteria. For example, some will not allow a payment holiday if your loan-to-value ratio after a holiday would exceed 80%
Remember that interest will build up during your payment holiday and be added to your mortgage. This means your monthly payments will increase after the holiday has ended
If you are not sure whether you are eligible, check with your lender
How do I organise a payment holiday?
First of all, check your mortgage terms and conditions to see if payment holidays are allowed.
Then consider whether a payment holiday is the right course of action - remember that your mortgage payments are likely to go up afterwards when the additional interest has been added.
Before you go ahead, find out what your monthly payments after a holiday would be and think carefully before committing yourself - you may just be storing up trouble for later.
If you still want to go ahead, you MUST contact your lender and apply for a payment holiday. If you simply stop paying without approval from your lender, you will be in arrears on your mortgage and your home will be at risk.
Your lender will be able to tell you whether you have met the conditions required to be granted a holiday and provide all the necessary application forms.
Check your mortgage terms and conditions
Think carefully before committing
Contact your lender to apply for a payment holiday
How much is a mortgage payment holiday likely to cost?
For example, if you have a mortgage of Ј200,000 at an interest rate of 4.5% over 25 years, your monthly payments will be around Ј1110.
So, after the first year you will have paid off a total of approximately Ј13,320, to reduce
your outstanding balance to Ј195,500 (remember you will be paying off interest as well as capital).
If you then take a three month holiday, the interest over the three months - about Ј2,200 - will be added to your outstanding balance, making a total debt of Ј197,700. To cover this shortfall after the holiday, your payments will go up by around Ј18.60 per month, to Ј1128.60.
That might not sound like much, but it all adds up. If you paid that Ј18.60 extra per month for the rest of the mortgage term (by now, 23 years and nine months), your total repayments would be approx. Ј335,000 (that's Ј1,128.60 x 285 payments, plus the Ј13,320 you have already paid).
Without a holiday, your total mortgage debt, including interest, would have been approximately approx. Ј333,000, so in effect the total cost of your payment holiday is over Ј2,000.
It is also important to remember that some mortgage lenders will only allow payment holidays if you build up some leeway by making overpayments before you apply. For example, if your mortgage payment is Ј500 per month, you must have paid an extra Ј500 off in overpayments before you can take a payment holiday for one month.
Always find out what your monthly payments will be after you take a holiday, before you take one
If at all possible, overpay your mortgage every month; this will reduce your debt more quickly, bringing down your monthly payments over time - and, depending on your mortgage terms and conditions, may give you the option of a payment holiday later, should you need it
What are the alternatives?
Clearly, this depends very much on your circumstances. If you want to take a payment holiday because you have run into financial trouble, you should speak to your lender to find out what your options are.
Lenders see repossession as a last resort, and would much rather come to an agreement that will allow you to continue paying your mortgage. Options might include:
Lengthening the term of your mortgage - for instance from 20 to 25 years - will help to bring down your monthly payments
Converting to an interest-only mortgage will also bring down your payments, but remember that you will eventually have to find a way to pay off the capital (i.e. the money you borrowed) as well as the interest you pay on it. Otherwise you will not own your home once your mortgage comes to an end
Try to save money in other areas, allowing you to keep up your payments. Putting together a household budget is a simple way to make sure you stay on top of your finances and can help you to identify ways to save cash
Get help. Citizens Advice offers free debt counselling and advice - visit www.citizensadvice.org.uk
When is the right time to take a payment holiday?
In simple terms, there isn't a good time to take a holiday. If at all possible, you should continue to pay off your mortgage every month. Finding the best mortgage deal for you and sticking to the payments (or overpaying if you can) is the most cost-effective way to deal with mortgage debt.
You should only take a payment holiday if you really have no other option - remember, it will cost you money in the long term, even though it will help you to cope with short term money worries.
The only time to consider taking a mortgage payment holiday is when you are struggling to meet your monthly payments.
This could be for a variety of reasons - from maternity leave to redundancy - but it is important that you consider all the options (and their implications) and speak to your lender before making a decision on what to do.
Consider all your options
Speak to your lender to find out how it can help - remember lenders are under pressure from the Financial Conduct Authority to treat mortgage customers with sensitivity, so don't be afraid to speak up if you are having problems
Treat a payment holiday as a last resort.