Not all holidays are created equal. However, much like summer holidays, mortgage payment holidays can offer a chance to relax and take the pressure off. While mortgage payment holidays create an opportunity to straighten finances, they shouldn’t be taken lightly. Like all fiscal decisions, and all holidays, they’re not without costs.
Discussions with a mortgage broker about the pros and cons will help you develop a well-rounded understanding of mortgage payment holidays. Such an understanding puts you in a great position to set your course of action and find a solution that suits you best.
What are Mortgage Payment Holidays?
Mortgage payment holidays are temporary reductions, or complete pauses, in repayments on a house. Borrowers and lenders negotiate mortgage payment holiday terms together, and the holiday can span anywhere from one to twelve months.
Some mortgage holidays reduce or halve monthly repayments in the short-term, while others temporarily switch the borrower to interest-only repayments. Other agreements involve a borrower repaying nothing at all for a short while.
What Are They Designed For?
Mortgage payment holidays serve borrowers whose finances have changed since they took out the loan. Such holidays generally support borrowers through sudden life changes or cash-flow difficulties. These changes might include redundancy, earning decreases, injury, emergency, or parental leave.
How Can You Apply?
Some mortgages don’t allow for payment holidays at all, while other, more flexible arrangements may already have them built into the agreement.
If you’ve previously overpaid on your mortgage and are ahead of schedule, this greatly increases your chances for a mortgage holiday. Strong credit ratings and trusting relationships with lenders also put you in great stead. Ultimately, arrangements like these vary from circumstance to circumstance, and hinge on financial history, current finances, and mortgage LTV, as well as plenty of other terms and conditions.
The Benefits of Mortgage Payment Holidays
Lifting the weight off your shoulders
Mortgage payment holidays offer acute treatment for acute financial circumstances. They help people in stressful situations, creating much-needed breathing room. In providing the clarity necessary for sensible forward-planning, they justify themselves to borrowers and lenders alike.
Temporarily balancing the books
By addressing one major monthly outgoing, these holidays allow borrowers to focus on other things. These things depend on the reasons behind the holiday: if you’re on parental leave, they may help you spend more time with a new born; if you’re on injury leave, they may help you recover and get back to work.
Creating a valuable planning window
It’s important to bear the cons of mortgage payment holidays in mind before deciding either way, and one major con is the time frame. These holidays work best when borrowers make the most of their time away from repayment and form a concrete and sustainable plan for getting back on track.
No effect on your credit score
Unlike arrears, these arrangements won’t affect your credit score, so they shouldn’t change your ability to borrow in the future. They may show up on your credit file (the record of your financial activity), but you can always check this with your lender or mortgage broker.
The Drawbacks of Mortgage Payment Holidays
Short term fix
Mortgage holidays are always temporary, so they’re a means to an end, not a destination themselves. It’s best to stay proactive during a mortgage holiday, and plan for the future as well as enjoying the here and now. Preparation helps you handle the financial shock when your mortgage payments resume.
Increasing your loan term and/or repayments
Different lenders offer different repayment plans for different mortgage holidays. However, it’ll be expensive either way. Some borrowers repay what they’ve missed in a lump sum at the end of the holiday, for example. Others increase their monthly repayments for the rest of their mortgage term, and some simply extend their term by the length of their holiday. Choose whatever suits you best, but remember that interest adds up over the years.
Conclusions: When do mortgage payment holidays work?
Thorough planning and expert advice create the most effective mortgage payment holidays. Ultimately, if you understand the pros and cons, show your workings, and develop a plan with a professional mortgage broker, such arrangements become effective and helpful financial tools.