Time for a staycation? Mortgage payment holidays explained
As part of its plan to reduce the economic damage done by staying at home during the coronavirus outbreak, the government has granted a holiday on what is many people’s biggest outlay: mortgage payments.
For three months, those who are paying off their mortgage will get a temporary break from their monthly payments, one of a number of economic measures announced by the chancellor Rishi Sunak last week.
The rule has been brought in for those who are at risk of falling into debt during the pandemic, and will mean payments are paused. The 90-day period will be added to the end of total mortgage terms.
What are the advantages?
For those facing a temporary income shortfall, this will provide some much needed space to breathe financially.
Indeed, many people, including freelancers and those on zero-hours contracts, are facing months of significantly lower income as a result of shops closing, events being cancelled, and the economy grinding to a temporary halt.
That is despite sweeping measures from the government to cover 80 per cent of workers’ pay up to £2,500 a month if they are unable to go to work.
“If you are struggling to pay your mortgage, or are likely to as an effect of the coronavirus, a mortgage payment holiday will give you peace of mind, releasing you from the monthly payments of what is likely to be your biggest outgoing,” says Mark Harris, chief executive of mortgage broker SPF Private Clients.
‘Not free money’
A payment holiday may not be the best financial choice for everyone.
Those thinking of applying for one should consider that, despite payments being halted temporarily, interest will still be accrued.
Moreover, many lenders are still working out exactly how to implement the measure, at a time when they are getting used to new home-working models and in some cases understaffed because of the coronavirus.
Harris adds: “During the payment holiday, the interest on the mortgage balance continues to accrue, resulting in a higher mortgage balance.
“When the payment holiday ends, the borrower will have higher monthly mortgage payments.
“It is not free money. We have heard of borrowers who are desperate to stop their mortgage payments but have struggled to get through on the phone to their lender to arrange the payment holiday and have simply cancelled their direct debit. This is not a good idea at all and will harm your credit rating.
“It’s very early days and lenders are still reacting to the announcement and formulating policy. They are also very busy with enquiries with potentially fewer resources as staff self isolate.”
What should I do if I need to apply?
The most important thing to do is to get the payment holiday agreed with the lender in advance — that way it will not affect your credit rating, says Harris.
Moreover, borrowers should keep a record of their conversations with the mortgage provider.
“It is good practice to make a note of any conversations you have with your lender about the payment holiday — who you spoke to and when — so if there is an issue when you come to remortgage in say two or three years’ time, you will have evidence that you did agree to a payment holiday and they were not simply missed payments.
“If dealing with your lender over email, keep an email trail.”
Also keep in mind that some providers are offering a range of ways to help customers through this difficult time, beyond what the government has set out.
“Some lenders have offered the standard three-month holiday while others have been keen to offer additional options, such as converting to interest only for a period or extending the mortgage term.
“Anyone concerned about their financial situation should get in touch with their lender sooner rather than later to discuss what options are available to them. Your lender can only help you if they know you are in trouble or likely to be.”