Lockdown 2: should I extend my mortgage payment holiday?

Lockdown 2: should I extend my mortgage payment holiday?

Lockdown 2: should I extend my mortgage payment holiday?

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With a further mortgage payment holiday available from 20 November 2020 to coincide with lockdown 2, we look at what to think about when considering suspending payments for longer.

The extended mortgage payment holiday will come into force from 20 November 2020, the Financial Conduct Authority has confirmed.

In early November, proposals were made to extend the mortgage payment holiday for a further six monthsfollowing the announcement that England was to go back into national lockdown until at least 2 December.

Mortgage payment holidays were first introduced to help those struggling financially as a result of the coronavirus pandemic.

So far more than 1.86 million homeowners have benefitted from mortgage payment holidays since the first lockdown. 

The extension means that those who have not yet had a payment deferral will be eligible for two payment deferrals of up to six months in total.

Those who currently have an initial payment deferral, will be eligible for another payment deferral of up to three months.

However, those who have resumed repayments after an initial payment deferral will be eligible for another payment deferral of up to three months.

This means homeowners who have had their payments deferred already can extend their mortgage holiday for a further three months until they reach the six-month limit.

Borrowers have until 31 March 2021 to apply for a payment holiday.

Who is eligible for a mortgage payment holiday?

The temporary suspension of payments is available to anyone who is not in mortgage arrears. Homeowners do not have to prove that their finances have been impacted by coronavirus lockdown.

However, some borrowers will not be eligible for the extension because they have already had two mortgage payment deferrals up to the six-month limit.

In such cases, the FCA has said borrowers who have already taken the full payment holiday but need further help should speak to their lenders to agree an alternative form of “tailored support”.

The FCA is also proposing that no one will have their home repossessed without their agreement until after 31 January 2021.

Under the mortgage holiday scheme, payments are deferred and the interest that would have been paid is added to the outstanding debt owed.

What happens when my mortgage holiday ends?

If you do not contact your lender when your initial three-month payment holiday ends, you will automatically revert back to making regular monthly repayments.

Some lenders may adjust the amount you repay to take into account the interest that was added to your outstanding debt during the period in which your payments were suspended. 

If you want to extend your mortgage holiday during the coronavirus lockdown, you need to contact your lender as soon as possible.

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While banks and building societies have agreed to offer the holidays until 31 October, this does not mean that you will automatically be offered an extension. 

Instead, lenders will work with borrowers to find the best solution for them financially. 

Options include extending the mortgage payment holiday or switching homeowners to an interest-only mortgage. An interest-only mortgage allows you to pay interest during the mortgage term and then repay the borrowed amount in full when it matures. 

Lenders might also agree on reduced payments or extend the mortgage term to make monthly repayments lower.

Is extending my payment holiday the only option?

If your income has fallen and you are struggling to make your mortgage repayments, extending your mortgage holiday could be a good solution for you.

It is important to remember that if you apply for an extension, lenders will want to be confident that the dip in your income is only temporary. They need to know that your earnings will return to their previous level when the coronavirus lockdown has ended.

If the fall in your income is likely to be long term, you should talk to your lender about finding a more sustainable solution.

Whatever you decide to do, it is important to remember that your mortgage will still need to be repaid at some point and extending your payment holiday will add to the outstanding debt you owe.

Will extending my mortgage payment holiday impact my credit score?

While getting into mortgage arrears would normally have a negative impact on your credit score, lenders and credit reference agencies (CRAs) have agreed that taking out a mortgage payment holiday will not affect borrowers’ credit scores.

If you are struggling to make your mortgage repayments, you are better off agreeing on a mortgage holiday with your lender than missing a payment.

This is because missing a payment would definitely impact your credit score.

Use the mortgage payment holiday calculator below, powered by mortgageholiday.co.uk, to see how your monthly payments may be affected by a holiday, and to find out how to apply:

Will extending my payment holiday impact future borrowing?

Although extending your payment holiday will not impact your credit score, it could affect the amount you can borrow in the future.

Lenders have to be sure that borrowers can meet strict affordability criteria when they advance them a mortgage. 

Extending your payment holiday beyond the initial three months could indicate that your income is vulnerable.

If you work in certain sectors, the dip in your pay may simply be due to coronavirus lockdown measures. It might return to normal as soon as these are lifted. Under these circumstances, lenders are likely to be understanding.

If you need to extend your payment holiday beyond the full lifting of the coronavirus lockdown, lenders may not want to take this income into account when calculating how much you can borrow. 

The same goes for if you are struggling to meet repayments due to a loss of overtime or a bonus.

Lenders might also consider the fact that needing to take a mortgage payment holiday is a sign that your finances are overextended or that you do not have sufficient emergency savings to fall back on.

My income has fallen. Should I extend my payment holiday?

If your income has fallen and you are thinking about whether or not to extend your payment holiday, you need to consider whether or not the drop in your pay is temporary or permanent.

If you have been furloughed due to the coronavirus lockdown but expect to return to work when restrictions are lifted, continuing to suspend mortgage payments could be a good option for you.

By contrast, if your work contract has been terminated, it might be better to talk to your lender about alternative options. This is because you might not be able to resume full mortgage repayments once the payment holiday ends without a regular income.

Deciding what to do if you are currently working reduced hours is slightly more difficult. 

If you are struggling financially at the moment but expect your hours to return to normal in the near future, a payment holiday extension could be a good option for you.

If your hours are not expected to increase soon, we advise that you discuss a more sustainable situation with your lender.

My income is back to normal. Should I extend my payment holiday? 

Lenders have been very clear that people whose incomes have returned to normal should resume full mortgage payments.

Their position is that people who can afford to do so should return to making payments in full as soon as possible to avoid their outstanding debt increasing.

Given the economic uncertainty due to coronavirus lockdown, many homeowners remain nervous about their finances and see a mortgage payment holiday as the opportunity to build up some savings as a buffer.

While this course of action may be tempting, it is better to keep up with normal mortgage payments if you can.

Doing so means lenders are likely to have more flexibility in the options they can offer you if you do find yourself unable to afford mortgage repayments in the future. 

It also means the amount of money you owe will decrease instead of increase.

Extending your payment holiday will lead to higher future repayments

It is important to remember that extending your mortgage payment holiday will lead to higher future repayments.

Lenders will add the money that you didn’t pay during your payment holiday to your total mortgage. When the three months are over, these repayments will increase with interest.

You will have to make these repayments each month for the rest of your mortgage term.

Alternatively, lenders may get you to make up the payments you missed through extending your mortgage term, meaning you will have to keep repaying your mortgage for longer.

When weighing up whether or not to extend your payment holiday, make sure you talk to your lender and consider all of the different options that may be available to you before making a decision.

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