Mortgage payment holidays have been extended
Mortgage payment holidays for homeowners whose finances have been impacted by coronavirus have been extended until the end of July 2021. Lenders also have a range of other support measures in place to help homeowners through this difficult time.
If you’re struggling to meet your monthly mortgage repayments or think you may do so in future, don’t panic. Instead, get in touch with your mortgage advisor or lender as soon as possible to discuss your options.
What is a mortgage payment holiday?
The mortgage payment holiday scheme was introduced in March this year, shortly after the UK went into lockdown for the first time.
It provides breathing space for homeowners who are struggling financially by enabling them to defer their mortgage payments for a period of up to six months, without their credit record being impacted.
Interest that would have been paid is added to the outstanding value of the mortgage, and the missed repayments have to be made up at some point.
The scheme, which has been used by more than 2.6 million people, had been due to end on October 31, but has been extended until 31 July 2021.
Will I qualify for the extended scheme?
The extended scheme is open to homeowners who haven’t already had their mortgage payments deferred for a total of six months.
As a result, if you haven’t previously applied for a payment holiday, you’re eligible to ask for two deferrals, which together can last for a total of up to six months.
If you’re currently on a payment holiday, you can apply for an extension until your payments have been deferred by a total of six months.
You can also apply for an extension if you have previously had a payment holiday of less than six months, even if you have fallen into arrears since the deferral ended or you’re currently receiving tailored support.
Any requests for a six-month mortgage payment holiday must be made in good time before 31 January 2021, while requests for a three-month one must be made by 31 March 2021.
The new scheme will come into full force from 20 November but will apply retrospectively from 1 November.
Should I take a payment holiday?
It’s important to think carefully before asking for a mortgage payment holiday, as it won’t be the right solution for everyone.
If you can still afford to make your mortgage payments in full each month, you should continue to do so.
If you’re struggling financially, ask yourself whether your situation is likely to be short-term, for example because your income has dropped as a result of being furloughed during lockdown, or longer-term, such as if you have been made redundant.
Mortgage payment holidays are good for tiding you over a short-term drop in income, but if you face a longer-term reduction in the amount you have coming in, you might be better off discussing other options with your advisor or lender.
It is also important to remember that interest will continue to accrue during a payment holiday, and deferred payments will have to be made up at some point.
What happens if I don’t qualify?
If you’re struggling to pay your mortgage but don’t qualify for an extended payment holiday, lenders have pledged to continue offering tailored support.
There are three main options if you fall into this category, namely extending your mortgage term, switching to an interest-only mortgage and making part payments, each of which has pros and cons.
1. Extending your mortgage term
The advantage of extending your mortgage term is that it can help to reduce the size of your monthly repayments to make them more manageable.
For example, if you have a £200,000 mortgage on an interest rate of 2.5%, increasing the mortgage term from 10 years to 20 years would reduce your monthly repayments from £1,886 to £1,060.
The downside of this approach is that it will lead to you paying significantly more in interest over the term of your mortgage.
In the example above, the total amount of interest paid by the time the mortgage is repaid in full would be £54,379, compared with £26,260 if you stuck to the 10-year term.
2. Switching to an interest-only mortgage
If you need your mortgage payments to be reduced more drastically, you may want to explore temporarily switching to an interest-only mortgage with your lender.
If you have a £200,000 mortgage on an interest rate of 2.5% and a term of 20 years, moving from a repayment mortgage to an interest-only one would cut your monthly payments from £1,060 to just £417.
But the change to an interest-only mortgage is only likely to be temporary, as you’ll still need to repay your loan in full eventually. Reducing the rate at which you’re repaying the capital you owe will also lead to you paying more interest in total, although the amount will vary according to how long you remain on an interest-only mortgage for.
3. Making part payments
If you can’t afford to make your full mortgage payment, lenders are also willing to accept part payments, such as covering the interest and a proportion of the usual capital repayment.
If you can afford to do so, making part payments is a better option than moving on to an interest-only mortgage, as you’ll still be reducing the overall amount you owe.
What should I do next?
If you’re about to miss a mortgage payment, it’s important to get in touch with your advisor or lender as soon as possible, as your options will be more limited if you’re already in arrears.
If you’re not about to miss a payment, lenders have requested that you don’t call them, as their lines are currently very busy. Instead, most lenders have dedicated mortgage payment holiday areas on their websites and banking apps which can be used to request a payment deferral.