How Do Mortgage Holidays Work?

Over 1.2 million people have taken advantage of the government’s scheme for mortgage holidays in the UK throughout most of 2020 for both first and subsequently second mortgages. You should however always check with your mortgage lender whether or not they will be able to facilitate a mortgage holiday and if so, how.

In light of the changes, we have all seen because of Covid-19, the government has told banks to offer mortgage repayment holidays for their customers, allowing them to pause their repayments as the economy and country are effectively closed during lockdowns and resuming as the country opens up.

The take up of these holidays for mortgages has been massive. As mortgage repayments are almost always the biggest outgoing expense for most households, taking a break from paying for a few months (on average, around 3-months) has given people some breathing space in cases where they have seen a drop in their income. In many cases, mortgage holders have lost their jobs altogether, with the mortgage break allowing people in such circumstances to find new employment and get back to repaying their mortgage.

What Is A Mortgage Holiday?

Once you have applied for and been approved for a mortgage holiday, you can take a break from paying your mortgage for up to 3 months. This effectively means you will be pausing your mortgage repayments to your lender. You don't need to take the full 3 months; you may for example only take one month if you believe that is what is best for you and your finances in the long run.

Remember, that by taking 3 a month break, your loan still accrues interest, so it will cost you potentially more money in the long run. Mortgage holidays are designed to delay rather than remove your debts when it comes to your home, both for first and second mortgages.

How Does A Mortgage Holiday Work?

You will need to get in contact with your bank or lender if you are interested in taking a break from your mortgage repayments. Some banks are offering online registration while others need a call from borrowers to request the holiday.

A mortgage holiday does not mean you can just cancel your direct debit and assume that your mortgage provider will think this is your way of asking for a holiday. If you do this, you will be failing how to make your mortgage payment and it will not reflect well on your credit score, potentially causing largescale damage to your credit rating.

How Will I Pay Off My Mortgage After a Mortgage Holiday?

Once your holiday is over, most banks will to increase your monthly mortgage payments to make up for the payments you missed. Thus, you will still be paying off your mortgage in the same time period, just paying slightly more each month. The amount that your repayments will increase by will be directly related to the three months you have pushed off, plus any additional interest.

For example, if you have a mortgage of £125,000 to be paid back over 25 years at an interest rate of 3%, you will be paying off around £593 each month. The total additional cost of a 3-month deferral is around £225. It is important to remember that you will be paying back this £225 over the next 25 years, so you won't be adding too much to your monthly payments.

Your monthly payments will rise by around £9 pounds per month. Although this is a small increase, it is important to remember that this is not a completely free of charge option. For those with much larger mortgages, the cost will of course be much higher. Also, the higher your interest rate, the more money it will cost you to take a holiday.

Do Mortgage Holidays Cancel Mortgage Debts?

No. It is crucial to remember that mortgage holidays are not a cost-free option and will not cancel or remove the debt and repayment obligations you will have. This applies to both first and second charge mortgages in the UK. The interest as well as the loan capital [the mortgage amount] will still require repayment once the holiday’s term has ended. If you do not arrange a mortgage holiday with your lender, failure to repay your mortgage may lead to property reposession proceedings.

With many lenders and often unless confirmed otherwise, the interest will continue to roll and accrue on the outstanding amount as the months progress, making mortgage holidays very much a short-term reprieve rather than a longer-term solution. Therefore, always make sure that you have really considered what is best for you before taking advantage of these holidays.