The pros and cons of taking a mortgage payment holiday
20th December 2017
The question of whether or not you should take a mortgage payment holiday is tricky to answer in general terms. Some see them as a helpful means of temporarily relaxing your monthly spending when you need some breathing room, whereas others see them as more trouble than they are worth.
As with any matter we cover here at IMC, the exact answer largely depends on your specific circumstances and requirements. In this post, we’ll be considering the pros and cons of taking a payment holiday on your mortgage and outlining some of the key considerations before you rush into a decision.
What is a mortgage payment holiday?
A payment holiday is available under certain mortgage plans and it allows you to take a break from your monthly repayments. The length of this break can range from just one month to over a year depending on your financial circumstances and the terms set out by your lender. Mortgage payment holidays are typically only offered by lenders when:
- You have built up a sufficient amount of credit through mortgage overpayments
- You are unable to make repayments due to unforeseen expenditure (e.g. car repairs)
- You have had a change of financial circumstances (e.g. redundancy or maternity leave)
As always, the exact circumstances in which a payment holiday will be granted depends on the type of mortgage and the mortgage lender in question. You should check the terms and conditions presented by your mortgage lender before approaching them about this (flexible mortgages are most likely to permit breaks on repayments). Taking a payment holiday requires a good history of repayments being made on time, often with no payments in arrears during the previous 12 months of your mortgage.
Taking off some pressure
Mortgage payment holidays are best saved for those occasions where you need some short-term relief from your mortgage due to a temporary problem. For instance, if you have been made redundant then arranging a payment holiday with your lender will take some pressure off your monthly outgoings until you find a new source of income. It’s one less payment to worry about in times where your cash flow is off balance.
Whether or not this is the right solution depends on your circumstances. Taking a break from your mortgage repayments is most sensible when you are in credit from previous overpayments on your mortgage. On the other hand, when falling behind on your mortgage repayments the solution is not to fall further behind by delaying those repayments. If you are consistently unable to meet your mortgage repayments for reasons that are not temporary (i.e. insufficient income or long-standing debts), taking a short break is not the best solution – a new mortgage deal or a reduced rate would be better in the long term. In such cases, you may want to consider consulting a mortgage broker to get the best deal in accordance with your monthly income and your financial circumstances.
It’s better than falling into arrears
When the only perceivable alternative is going into mortgage arrears you may be better off taking a payment holiday until you can find your feet again. This should act as a last resort when faced with financial troubles rather than an ‘easy way out’ of them. Just make sure that you have a defined plan as to how you will get back on track so that you don’t end up relying on the relative ease of forgoing your repayments.
It may sound obvious, but mortgage debt is best avoided by taking on the best mortgage deal for you and sticking to each repayment. This has the added benefit of avoiding any extra costs from increased interest. Again, you must be confident that the holiday is only a temporary measure, and you should plan ahead for the extra costs that will be incurred during your break. Be sure to read the ‘cons’ listed below before resorting to this measure so that you are prepared for the more negative consequences.
Higher payments after your holiday
The overall cost of taking out a mortgage payment holiday is notably high. Your mortgage repayments do not simply disappear during the time you take a break from them. You will still have to repay the entirety of your mortgage, both capital and interest, often in the same amount of time (unless you extend the length of your mortgage). This means that the cost of your repayments in capital will end up being higher than they were before you took the repayment holiday.
This increased cost is usually only a few pounds per month depending on the length of your break, but this increase applies to the remainder of your mortgage. On holidays that last over a couple of months, this could leave you with some serious catching up to do! As such, if you are taking a repayment holiday because you need some breathing space from the high costs incurred by your mortgage you will likely end up with even more stressful payments in future.
This increase in cost is also partly due to the fact that your overall mortgage balance still accrues interest during the payment holiday. This interest has to be accounted for throughout the rest of your mortgage. As the outstanding mortgage debt gets bigger during your payment holiday, so too does the amount of interest you get charged. Depending on the length of your holiday, this factor could increase the amount of total interest paid on your mortgage by thousands over the years. Such costs are easily avoided by exploring alternative mortgage solutions with a reliable financial advisor.
Decreased credit rating
Since your credit rating could be affected negatively when you take a payment holiday on your mortgage, you may find yourself struggling to attain credit in the future as a result. Even if you are justified in your reasoning and your lender is happy to grant you a holiday, lenders may consider the measure as a potential risk when it is listed on your credit report.
It’s worth asking your lender about the effects of the arrangement on your credit rating as some may list mortgage holidays as arrears (as if you had missed the repayment) on your credit file. Whatever your circumstances, it’s always a good idea to ask your lender well in advance if you are planning on taking a mortgage payment holiday: present them with legitimate reasons for your break and make it clear that you are making a prior arrangement to pay. If they suspect that you are simply missing a repayment, they will consider it as such on your credit report.
IMC provide expert advice covering all areas of the financial market, from mortgages and wills to insurance and and estate planning. We will provide solutions that are tailored to your individual needs and circumstances, so feel free to get in touch for a professional and personalised service.