How Does a Mortgage Holiday Work?

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Added on May 23rd 2020

In March, the Chancellor, Rishi Sunak, announced that the government was bringing in a three-month mortgage holiday scheme to help homeowners in financial difficulty due to the covid-19 pandemic.

The scheme, which may be extended beyond three months, will help to relieve the financial stress on households whose income has been affected as a direct result of the viral outbreak, as well as to give them time to get back on their feet.

Is the holiday automatic?

No, you’ll have to apply for a holiday. Not everyone with a mortgage will be affected by the pandemic, so they won’t need this help. The government is strongly encouraging lenders to offer applicants payment breaks, so if you apply it’s likely you’ll be successful.

Who’s eligible for the mortgage holidays?

People who are up to date and are facing genuine financial impacts due to coronavirus are eligible. Anyone in arrears that predate March 2020 may not be able to apply, but if their ability to catch up with payments is affected, then they may be able to ask their mortgage lender for other types of help and relief. Lenders will try to offer the most appropriate form of help for each customer facing difficulties.

What about buy-to-let mortgages?

Buy-to-let mortgages are also included in the holiday scheme, as well as live-in landlords with mortgages.

Applying for the covid-19 mortgage holiday

You should contact your lender as soon as possible to discuss your options. Many lenders with an online presence or with banking apps have added an application function to their sites, which can make things easier. Of course, if you’re not sure a holiday is right for you, or if you think you could make partial payments, then you should discuss your options.

Under normal circumstances, lenders would look at a customer’s finances in depth before making a decision, but the rules have been relaxed somewhat in order to offer a streamlined, rapid process for most people.

The payment break in practice

Successful applicants will have their contractual monthly payment reduced to zero (or the figure you’ve agreed with your lender) for one, two or three months. Interest will still be generated on the balance, however, which means that once payments resume, they’ll be slightly higher than they were before. While the holiday scheme may be extended beyond three months, it’s important to recognise that it’s not suitable for borrowers who may face a more permanent reduction in income.

Will the holiday affect credit scores?

Mortgage lenders will make all the necessary efforts to make sure that borrowers who take a holiday due to covid-19 don’t get negative entries on their credit files as a result. However, if you fall into arrears due to the pandemic and only then ask for a holiday or any other forms of help, these arrears may well be reported to the credit agencies.

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