What is a mortgage repayment holiday?
A repayment holiday offers you the chance to take a break from paying all or part of your mortgage for a period of time – usually up to 6 months. Not all lenders will necessarily offer this option however, so you would need to check with your lender. Also, most lenders will have specific criteria around who can and can’t take a repayments holiday. These criteria might include such things as:
- How long you have had your mortgage for
- What percentage of the value of your home you have outstanding
- Whether you have previously taken a repayment holiday or not.
Again, you would need to check with your lender to find their terms.
On the face of it, if money is tight, a repayment holiday may seem like a no-brainer. But it is not as simple as that, as there are some fairly significant disadvantages to be aware of.
Firstly, although you may not be paying your mortgage for a few months, the interest doesn’t stop accruing. This means that at the end of your repayment holiday, your monthly payment will increase. If your money issues are not resolved at this point then this could compound your financial difficulties. Also, this accrued interest will increase the total amount you will repay on your mortgage, and possibly significantly so. See the below example for an illustration of this (sourced from this calculator at onlinemortgageadvisor.co.uk)
- Initial mortgage value of £150,000 taken out on 1st January 2019
- Fixed interest rate = 4%
- Term = 25 years
- Repayment holiday term = 6 months
|Monthly Mortgage Payments||Total Mortgage Repayments|
So you can see that in this example, the 6 months repayment holiday ends up costing £2,429 and increases the monthly repayments by £27. Also, taking a repayment holiday may go on your credit file and negatively impact your credit score. This may make obtaining credit in the future more difficult or more expensive.
If the reason that money is tight for you is because of a permanent change in your household finances, either because your income has dropped or your essential expenses have increased, then a mortgage repayment holiday is only going to be a short term stop gap and is not going to be a long-term solution – you will likely still have the same issues meeting your repayments when the holiday term is up. In this scenario, you may be better off speaking to your mortgage provider to see if there is any way to lower your monthly repayments – potentially by moving to a longer term deal.
If you have overpaid on your mortgage in the past then your lender may be willing to allow you to underpay for a time. Although you must get your lenders permission to do this before you underpay as otherwise these may just be deemed as missed payments and could put your home at jeopardy of repossession and negatively impact your credit rating.
So when is a mortgage repayment holiday a good idea then?
In general, if you have a temporary drop in income that is going to make things financially difficult for you, then taking a break from paying for your mortgage may be a really useful way to relieve the pressure until such a time as you are back to your previous financial position.
But it is not to be entered into lightly and without giving due consideration to the negative aspects previously discussed here, including an increase to your repayments to cover the interest accrued and the potential damage to your credit score.
If you’re worried about increasing levels of debt or are concerned about your financial situation, the organisations listed below could help you by providing free and impartial advice: