Are mortgage payment holidays really a good idea?

Patrick Collinson
Photograph: Chris J Ratcliffe/AFP/Getty Images

About 1 million mortgage holders have applied for a payment holiday in the past fortnight, according to industry sources. Should you do so, too?

1. It’s not free money. But it’s very cheap. Let’s be clear that you still have to pay for your holiday, the banks are not just writing off the money. They add whatever you didn’t pay to your total mortgage, and when the three months is up your repayments go up. But with interest rates so low, it makes surprisingly little difference. For example, using Moneyed.co.uk’s mortgage calculator, a £200,000 mortgage taken out in May 2018 at a 2.5% rate costs £897 a month. If you take the three-month holiday, afterwards the cost will rise to £910 a month. “If the choice is between really struggling or taking the mortgage holiday, then the additional cost further down the line is actually quite small beer,” says broker Ray Boulger of John Charcol.

2. It won’t hit your credit record. Experian, Equifax and the other agencies have agreed an emergency payment freeze, to ensure your current credit score is protected for the duration of an agreed payment holiday.

3. The banks have to offer it. Before coronavirus, banks were under no obligation to even have payment holiday processes in place. Now they do, and most will offer it – although not to everybody. They know from your original mortgage application what your job and pay is, and may reject you if you are still earning. One broker told me this week a doctor and his partner (also a medic) were refused a payment holiday – because the bank said they were both evidently in work and not furloughed.

4. You can still get a rollover deal.

You certainly won’t be able to scan the market for a great deal at the end of your fixed-rate term. But the bank should offer you a product transfer to its other existing fixed deals.

But don’t automatically rush to get a payment holiday.

1. It’s too soon. Mortgage brokers report that people are panicking and doing it too early. If, say, your partner is still receiving an income, and your usual outgoings are down, it makes sense to defer the payment holiday until you really need it.

2. Just stopping your direct debit is a disaster. Some mortgage holders, frustrated at not being able to get through to their banks, are just halting their monthly payment. Don’t do that: it will be a disaster for your credit record.

3. If you have only a short term left on the mortgage, it will cost you a lot. The maths work against you in terms of repaying the holiday if you only have a few years left on the loan; your monthly costs will shoot up after the three months.

4. You could switch to interest-only instead. Barclays is among the banks saying why not shift to interest-only instead for 12 months. Switching a £200,000 loan to interest only cuts the cost from £897 a month to £417, and the benefit lasts for a year.

p.collinson@theguardian.com