How do payment holidays work?
Millions of people took a payment holiday on their mortgage, credit card or loan payments during 2020, due to the coronavirus crisis.
While the Covid-19 payment holiday scheme has now ended, many lenders are still offering support to their customers. This may include ‘normal’ payment holidays, which have been around for years.
What is a payment holiday?
A payment holiday is an agreement with your lender to pause your mortgage, credit card or loan payments for a set period.
They are sometimes granted if you’re struggling to keep up with your repayments.
It’s important to remember that interest charges normally continue to be added during a payment holiday. The interest will be added to your total balance, so your minimum payment might go up once the payment holiday ends. For this reason, it’s important you speak to your lenders about your situation, and how you can make monthly payments once they restart.
How do I get a payment holiday?
You can request a payment holiday from your lender, but they don’t have to agree to it.
You’ll need to tell them the reason for the holiday. The lender may ask some questions about your finances, to make sure it’s the right option for you. You’ll need to explain how a payment holiday will help you manage repayments, and when you’ll be able to start paying them back again.
If a payment holiday isn’t the right option for you, there’s still help available in the form of ‘tailored support’. This will be based on your individual circumstances but could involve things like allowing reduced payments. We cover what tailored support involves in more detail below.
Will a payment holiday affect my credit rating?
A payment holiday will usually appear on your credit report and will likely affect your credit score. This can make it harder to take out credit in future. If in doubt, ask your lender how your payment holiday will be shown on your credit report.
However, payment holidays that were offered due to Covid-19 (between 17 March 2020 and 31 July 2021) won’t appear on your credit report, and so won’t affect your credit score.
Could a payment holiday affect my mortgage application?
Payment holidays can affect your mortgage application, as they normally appear on your credit report.
Even if you’ve taken a coronavirus payment holiday (and remember, these don’t appear on your credit report), it could still affect your mortgage application.
This is because lenders don’t just use credit reports and credit scores to assess your creditworthiness when you apply for a mortgage. They also use information from your application form, and sometimes your bank account, to consider whether you can afford the new payments. If you’ve taken a recent payment holiday, some lenders may look at your application more carefully.
What are the pros and cons of a mortgage holiday?
Mortgage holidays can provide some breathing space – but remember that interest will still be charged and added to the balance. This means that your normal monthly payment might increase slightly afterwards.
So, a mortgage holiday may be worth considering if you’re only facing a temporary drop in income. But they aren’t a good idea if you’re struggling to make payments because your income has dropped permanently.
Don’t forget you can discuss other support options with your lender. This might include things like a reduced monthly payment, switching to interest-only, changing the interest rate, or altering the term of the mortgage. It’s a good idea to discuss with your lender how any support measures will show on your credit report.
If I have a payment holiday on one of my credit accounts, will I automatically have a payment holiday on all my credit accounts?
If you have more than one account with a lender (for example a credit card, loan or mortgage) you’ll need to arrange a payment holiday for each account. If you have accounts with different lenders, you’ll also need to speak to each one to arrange a payment holiday.
What if I'm on a 0% deal – will I lose it if I take a payment holiday?
It depends on the lender – so if you’re not sure, ask. If the lender says you’ll lose your 0% deal, it could be worth negotiating with them. (After all, you’ll find it easier to get back on track with repayments if you’re not paying interest).
What help is available if I’m not offered a payment holiday?
If you’re struggling with payments for any type of credit, check what help your lender offers.
Lenders will typically offer ‘tailored support’. The support you are given will depend on your circumstances.
For mortgage holders, tailored support could include a pause or reduction in payments, or changing the terms of your mortgage.
For those struggling with loan or credit card payments, tailored support could involve pausing or reducing payments, or agreeing an affordable repayment plan.
Be aware that if your tailored support results in you pausing or reducing your regular payments, this is likely to appear on your credit report in two ways.
Firstly, an arrangement ‘flag’ will appear on your report for three years after the arrangement ends.
Secondly, you’ll probably see ‘arrears’ on your credit report if you’re not making the minimum payment set in the original agreement. (‘Arrears’ means the amount of money you owe and should have paid earlier).
These changes to your report will likely affect your credit score and chances of getting accepted for credit.
Lenders should explain how any support they offer may impact your credit report.
Remember if you’re worried about money, you’re not alone. Free confidential help and advice is available from charities such as StepChange, National DebtLine and Citizens Advice. They can advise you, and even act on your behalf to help with any debts you might have.