Some mortgage providers are still offering the chance to defer payment of your home loan under certain circumstances. Here’s how to go about taking a mortgage holiday.
If a change of circumstance – such as being made redundant – makes it difficult to meet your monthly mortgage repayments, you should check the terms and conditions of your home loan to see if you could be eligible for a payment holiday.
Mortgage holidays are not intended for borrowers falling into arrears, but are designed to ease the financial burden for borrowers in certain situations – including switching jobs, taking a career break, deciding to start a family, or losing another regular stream of income altogether – by giving them a break from their monthly payments.
Enquire about taking a break
While mortgage holidays are becoming less and less common, lenders are aware of the need to be flexible. If you enquire, you may find your provider is prepared to offer you some form of mortgage holiday facility.
But do bear in mind that just because this facility is offered, it doesn’t automatically mean your bank or building society will make it available to you.
A payment holiday will need to be agreed with your lender – and your reasons for taking the break will need to be watertight.
Don’t ignore the problem
At the same time, your mortgage provider would rather know you’re under the cosh now – and that you intend to do something about it – rather than waiting until you’re defaulting because you can’t afford the repayments.
The key is to contact your lender at the earliest opportunity – and to be open and upfront.
After all, your bank or building society would rather keep you in your home than have to force you out, as repossessing a property takes time and costs money.
So how does a mortgage holiday work?
Payment holidays allow homeowners to stop their mortgage repayments for an agreed period, often between three and 12 months.
They are normally only permitted if you have been a customer for a set period of time (at least a year) and provided you have consistently met your repayment schedule on your mortgage.
A break may also only be possible if you have previously made overpayments, or if your equity is more than a certain amount - say 20 per cent.
Crucially, you need to remember that a break from paying monthly doesn’t mean a break from paying interest –that will continue to accumulate and will be added to your loan until it is repaid in full.
If you’re concerned about not being able to meet your mortgage repayments should your circumstances change, you should start planning now.
As a first step, you should start setting spare funds aside to build a savings cushion.
You could also talk to your lender about switching the mortgage to interest-only, or lengthening the term.
Help for struggling borrowers
When Alistair Darling was chancellor under the last Labour government, he made a plea to lenders to help customers weather the credit crunch storm.
With the economy still weak, the banks remain under political pressure from the current coalition government to go easy on borrowers who are falling into arrears – and to use repossession as an absolute last resort.
Changes to SMI scheme
The previous Labour government helped cash-strapped borrowers by bolstering the Support for Mortgage Interest (SMI) scheme – a benefit paid to homeowners on income support, jobseeker’s allowance, or pension credit. The size of mortgage able to claim support was increased from £100,000 to £200,000, and the waiting period was reduced from 39 to just 13 weeks.
However, although the coalition government recently extended those limits until January 2012, it also almost halved the payment rate in October this year.
Under the changes, the maximum mortgage interest rate the government will cover was cut from 6.08 per cent – regardless of how much a lender charged – to just 3.67 per cent.
The coalition claims this better reflects average mortgage rates, but if you are paying 5 or 6 per cent on your home loan, you could be hit hard.
Indeed, for a small number of borrowers, the changes have meant a move into arrears – and a step closer to repossession.
For free debt help visit the Consumer Credit Counselling Service , Citizens Advice and National Debtline.