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During their tenure as a homeowner, borrowers may endure periods of extreme financial strain. This forces them to drastically scale back on outgoings. The largest expense typically being mortgage payments. Classed as an essential investment which not only guarantees shelter but provides life’s necessities. Scrambling to raise funds to fulfil mortgage payments not only has the power to deteriorate financial health but also borrowing ability. The impact this will have on the mortgage holders’ creditworthiness and eligibility will differ based on the rulings for each financial institution.
If borrowers find themselves in the grave position of not being able to fulfil their mortgage payments, this will typically represent plunging levels of affordability. This may be remedied by a mortgage holiday – as an ultimate final resort.
As business distress levels soar and UK redundancy levels rise to a record high (due to the coronavirus pandemic), homeowners with mortgage responsibilities are inevitably being pushed into serious financial difficulty. It’s instrumental for those taking advantage of mortgage holidays during Covid-19 to understand the repercussions of seeking this relief. This differs to mortgage holidays taken under standard terms, unrelated to Covid-19.
What is a Mortgage Holiday?
A mortgage holiday is a break from mortgage payments granted by your mortgage lender in the event of serious financial difficulty. A mortgage holiday will typically last three months, up to a maximum of six months, however, the rules and repercussions vary per lender.
If mortgage payers find themselves in this position, they should consider the extremity of their situation. A mortgage holiday should be the final option. If reduced payments can be negotiated with the lender, this should be explored before requesting a mortgage holiday. A mortgage holiday could have a long-term impact on your borrowing ability.
What are the Financial Repercussions of Taking a Mortgage Holiday?
If mortgage payers are in the position of serious financial distress, they should assess if they have the means to survive without seeking this form of relief. This is likely to cause long-term consequences. If there are no other options available, the implications of taking a mortgage holiday are the following:
- Revised monthly instalments –Monthly instalments may be increased to take into consideration the mortgage holiday, interest, and associated fees. If by seeking short-term relief, the monthly burden is likely to increase, the borrower may revisit alternative options as this could damage their long-term financial health.
- Extended mortgage term – The mortgage holiday payment may be slotted to the end of the mortgage-term, extending the length of the mortgage.
Interest will accrue during the mortgage holiday, increasing the payments made over the long run. When requesting a mortgage holiday, the formal route should be taken. Failure to take this route and cancelling your direct debit could result in the lender registering the payment break as a missed payment, adversely impacting your credit file.
Can a Mortgage Holiday Impact Borrowing Ability?
Lenders have confirmed that a mortgage holiday shouldn’t impact your credit record. Be aware, this may be visible to lenders when conducting due diligence as part of a loan application. In addition to carrying out a credit check, lenders also take into consideration banking data. By identifying sudden mortgage payment gaps, this is likely to indicate a mortgage holiday, therefore implying financial struggle. It is instrumental to only request a mortgage holiday in dire circumstances. It could make it harder to remortgage and impact your borrowing ability.
Taking a Mortgage Holiday During Covid-19
In light of Covid-19, the government announced financial support for homeowners struggling to cope with a financial loss. As lenders opened their doors to mortgage holiday applicants, the deadline was recently extended to 31 March 2021.
Nearly two million mortgage holders have accessed mortgage holidays as a direct result of the coronavirus pandemic. UK Finance, the financial services trade association, found that around 70% of people who have taken mortgage holidays did not do so because of financial reasons. Highlighting the need to crack down on unnecessary debt.
As the coronavirus pandemic threatens the livelihoods of tenants, landlords and mortgage holders alike, the economy is preparing to restart as it sets sights on stronger trading conditions following news of the vaccine. To answer – is it worth taking a mortgage holiday in the long run? This will depend on the extremity of the financial circumstances of the mortgage holder and if they can justify the financial repercussions as stated above.
Jon Munnery is a partner at UK Liquidators, UK’s largest company liquidation provider for business owners looking to close their limited company or explore company restructuring routes.
