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.

Recommended

Why homebuyers should be wary of the new crop of 95% mortgages
Mortgages

Why homebuyers should be wary of the new crop of 95% mortgages

The government has rolled out a new state-backed 95% loan-to-value mortgage scheme. But there are several drawbacks.
7 May 2021
Equity release: should you take money out of your home?
Equity release

Equity release: should you take money out of your home?

Tapping your home for cash via equity release has never been cheaper or easier. But there are pitfalls – so is it right for you?
28 Apr 2021
The return of the 95% mortgage – what’s available and how much they cost
Mortgages

The return of the 95% mortgage – what’s available and how much they cost

With the chancellor announcing a government guarantee on 95% mortgages in his Budget, products have started hitting the market. Nicole Garcia Merida l…
1 Apr 2021
Why are house prices so high? And what could make them more affordable?
House prices

Why are house prices so high? And what could make them more affordable?

House prices in the UK are at an all-time high – but they just keep going higher. And that’s not because of rich foreign buyers or a lack of supply, s…
23 Mar 2021

Most Popular

How will Joe Biden’s capital gains tax rise affect crypto prices?
Bitcoin & crypto

How will Joe Biden’s capital gains tax rise affect crypto prices?

The US president wants to increase capital gains tax – and that’s going to hit a lot of American cryptocurrency speculators. Saloni Sardana looks at h…
14 May 2021
Are we nearing the end of the negative bond yield era?
Government bonds

Are we nearing the end of the negative bond yield era?

As inflation gets going, the era of the negative bond yield – that investors have to pay governments for the privilege of lending them money – might b…
14 May 2021
Inheritance tax planning: the rules around gifting
Inheritance tax

Inheritance tax planning: the rules around gifting

There are plenty of legal ways to minimise an inheritance tax bill. Perhaps the simplest is to give away assets to reduce the size of your estate. Dav…
11 May 2021