Mortgage payment holidays

Posted by Sharon Yewen in Mortgages on 31 July 2012 - Sharon is Financial Controller at checkmyfile.

As we all struggle to make ends meet, it may sound tempting to take a mortgage payment holiday, which is where the lender will let you off repayments temporarily.

This sounds like a short term answer to the financial pressure by reducing our monthly outgoings and giving some breathing space, especially when faced with some unexpected expenditure, being made redundant or taking a career break.

Most lenders offer payment holidays and all have certain conditions to meet, and each will treat your request very differently, in particular in respect of how the 'gap' is reported to the credit reference agencies.

The repayment holidays are only temporary, often covering just a few months, and monthly mortgage payments must have been made successfully for a minimum amount of time and mortgage payments must be up to date at the time of asking for the payment holiday. Interest still accrues and is added to the outstanding balance.

As the debt increases with accumulated interest, there is more of a chance of falling into negative equity (which is where you owe more than the property is worth). Clearly this is a greater problem when property prices are falling quickly.

It is this last condition which contains the real cost of the payment holiday.

As interest accrues, the missed interest payments are added to the mortgage and this means that the next month’s interest charge will be higher as the outstanding debt increases- and so it continues until the end of the payment holiday.

After the break then the monthly payments increase over the rest of the mortgage term. The result is that by taking a payment holiday you end up paying more in monthly repayments and ultimately over the remaining term.

The upshot is that mortgage payment holidays - although initially tempting - come at a hefty cost. They are expensive but are always preferable to falling into arrears. Either way, the best course of action when you are struggling to make mortgage payments is always to speak to the lender first – they may allow reduced payments or an extension in the term of the mortgage.

But make sure you also ask the mortgage lender how it will report your account to the credit reference agencies. If this appears as an ‘Arrangement to Pay’, this can have a serious impact on your ability to get credit generally, and will stay on your credit reports for six years, long after the payment holiday is forgotten. Other lenders may also consider a missed payment to a mortgage lender to be a sure sign of financial stress and treat it much more seriously than several late payments with mobile phone companies or unsecured lenders.

Sharon Yewen is Financial Controller at Checkmyfile. She is an FCA and has a degree in accountancy from the University of Exeter. You can contact Sharon at sharon.yewen@checkmyfile.com

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