Sometimes we face uncertain situations that make it difficult for us to keep a tab on our finances. And the most hard-hitting areas in our life is – loan repayments. COVID-19 has made a ruckus of our financial lives and credit providers have taken initiatives to help their borrowers. They are allowing the borrowers to opt for a mortgage holiday (read: payment holiday) who are facing difficulties with repayments. This step can prove to be a financial respite for a lot of people, however, there are a few things that you should know about these mortgage holidays.
What is a mortgage holiday?
The Government has been drafting initiatives to help the people and sustain the economy during this pandemic. Chancellor of the Exchequer, Rishi Sunak in March announced that mortgage lenders should allow financial breathing space to their borrowers. Lenders may offer a three-month repayment holiday to their borrowers who are struggling to make ends meet.
A mortgage holiday allows you to pause your payments for a temporary period. As a borrower, you can apply for a mortgage holiday for a maximum period of 3 months. That means for 3 months, you will not have to make the repayments on your loan. However, during these 3 months, interest will continue to accrue on your mortgage.
Mortgage holiday – Is it a good idea?
A mortgage holiday is a temporary financial relief. You should opt for it only if you are struggling to make the repayments. And you should also figure out how to stabilize your finances within those 3 months. As when that period ends, you are expected to make the repayments.
Another important thing to consider is – the interest will be accrued and it will be added to the unpaid balance. It will increase the overall cost of borrowing. If you have been facing issues with your finances and payment holiday isn’t the solution – contact your lender. Credit providers may have different solutions to offer according to your situation.
Take out a mortgage holiday only if you can make the repayments once the payment holiday is over. Otherwise, there is a possibility that you may end up accumulating a huge amount of debt that later on will become unmanageable.
How does a mortgage holiday impact your credit score?
Your credit score will not be impacted directly when you take a mortgage holiday. These temporary measures will not impact your credit report as per the Financial Conduct Authority (FCA). Also, the three major Credit Reference Agencies are playing a big role in protecting the credit score of the individuals.
If you have a personal loan, credit card debt, store card, mortgage or catalogue credit, you can apply for a mortgage holiday. But if after the agreed period of the payment freeze ends, you will have to make payments on time. If you fail to make repayments on time post that period, your credit score will be impacted.
Here are a few things that you can do to protect your credit score if you are considering to take a mortgage holiday:
- Make sure that you keep up with the repayments until you discuss your situation with the lender and an official agreement is drawn.
- When you are on a payment holiday, the CRAs will apply an “emergency payment freeze” on your credit record. Check your credit report every once in a while for confirmation. Raise an alarm if you spot any errors in it.
- Remember that the payment freeze can last only up to 3 months. Therefore, stabilise your finances within those months so that you can start repaying the loan without any trouble after that period ends.
- If you are considering to increase the term of your mortgage as that will allow you to make smaller monthly repayments – talk to your lender. Although this will ease you up a bit it will increase the total cost of borrowing. And if you cant manage to keep up with the loan repayments, your credit score will be damaged.
Will a mortgage holiday impact your ability to borrow in future?
As discussed above, taking a mortgage holiday doesn’t impact your credit score. However, lenders can see this information on your credit report while assessing your profile. Every financial activity is reported on your credit report. Hence, when you apply for a mortgage holiday, it gets recorded on your report.
The report will give a glimpse of the overall balance that is left to be paid and this will help the lenders to make their decision. The overall value of debt is taken into consideration. And if you have a huge amount of unpaid debt, then it may come in the way of your loan approval.
Your lender has the responsibility to explain the implications of the financial decision that you are about to take. Ask your lender for any available alternative that may be helpful for you. Go through the new agreement that is drafted and check for every relevant piece of information. For example, what will happen when the period expires, how your monthly repayment amount will change after that.
Talking to your credit provider before taking a financial decision is important. Hence, get in touch with your lender and talk at length about it.