Beware: mortgage payment holidays could cost you
Taking a break from mortgage or credit-card debt could ultimately cost you more in extra interest than the money you save.
If you are taking a payment holiday from your mortgage or credit-card debt, tread carefully. Not paying your bills – even with the approval of your lender – could lead to problems with your credit rating and cost you hundreds of pounds. So far 1.6 million homeowners have taken a repayment holiday on their mortgage. It means you won’t have to make your monthly repayments for a few months, which could come in very handy during lockdown. But your bank is going to do very well out of the arrangement.
Lenders are set to make at least £821m in extra interest as a result of people taking a break from their mortgage repayments, says Kate Palmer in The Times. The average borrower will save £2,256 in repayments over a three-month mortgage holiday. But “they will ultimately pay £500 more than without the break because of the interest accrued on the unpaid sum”.
Anyone taking a mortgage holiday also needs to be careful it doesn’t lead to problems with their credit report. Don’t cancel your direct debit until your lender has confirmed that your application for a repayment break has been accepted. Banks are struggling to cope with the number of customers wanting a mortgage holiday, leading to delays in approvals.
“Those who miss a mortgage payment because a break has not yet been confirmed by the lender could be marked as going into arrears,” says Marianna Hunt in The Daily Telegraph. “This could affect their credit score and result in extra interest being charged.”
Even if you do everything by the book, a mortgage repayment holiday could affect your future ability to get a mortgage. The Financial Conduct Authority has confirmed that “banks could take a holiday into account when they decide whether to offer a mortgage”, says Hunt.
The same advice applies if you are stopping your credit-card repayments. Your interest will continue to build, so you will owe more when you restart paying and it could affect your credit rating – even though it shouldn’t. Some borrowers are taking a hit to their credit report as lenders accidentally report repayment breaks as missed payments.
Pre-empt this by waiting until you have received formal approval for a payment holiday before you cancel your direct debit. If you have taken a repayment holiday keep an eye on your credit report. If a payment is marked as late or defaulted contact your lender and ask them to correct it.