Payment holidays and your credit score

What is a mortgage payment holiday?

A mortgage holiday is an agreement that you come to with your lender which allows you to stop making your mortgage repayments for a set period. It can relieve some financial pressure if you’ve recently had a temporary drop in income.

You may be able to take a payment holiday of up to 12 months, depending on your circumstances and how well you’ve made repayments in the past.

Some lenders may only grant you a payment holiday if you’ve previously overpaid on your mortgage and built up enough credit to be able to take a break.

It’s worth noting that not all lenders offer mortgage payment holidays unless it’s stated in your loan agreement. But it’s still worth getting in touch with them. If they can’t offer you one, they may be able to alter your repayment plan instead.

Lenders may agree to a payment holiday if you’re struggling to make repayments due to a change in your financial situation, like being made redundant or taking maternity leave.

Your financial situation may have also changed unexpectedly because of the COVID-19 pandemic. See below for more information about how lenders have adapted to this.

Coronavirus and payment holidays

Some lenders have offered three-month mortgage payment holidays to borrowers that have had their income affected by the COVID-19 pandemic. Like a normal mortgage holiday, you’ll still be charged interest, however it may give you a temporary break from repayments or allow you to make smaller repayments.

It’s not just mortgage lenders that are offering payment holidays, other personal loan lenders and credit card companies have as well. If you’re struggling to make repayments or your financial situation has changed due to COVID-19, get in touch with your lender and they will let you know if they can help.

As of 20th November 2020, mortgage customers that have not yet applied for a payment holiday can request one for up to six months. If you have previously applied for a payment holiday for less than six months, then they should be able to extend it to up to six months in total.

Consumer credit customers will be eligible to apply for payment deferrals of up to six months in total. From 25th November 2020, high-cost short-term credit customers will be eligible for a payment deferral of one month. This would not be reported as a missed payment on credit files.

Possible drawbacks of a mortgage holiday

A mortgage holiday should only be used as a short-term solution, as interest will continue to be added onto your mortgage during the holiday period. Therefore, your monthly repayments will increase once your payment holiday has ended.

If your income has been reduced permanently, or you are struggling to make it stretch, check out our tips for keeping on top of your finances. You could also consider seeking free and impartial advice at www.moneyadviceservice.org.uk.

Will a payment holiday impact my credit score?

Taking a payment holiday due to COVID-19 will not directly impact your credit score as the payment break will not be shown as missed payments.

If your account is fully on track and you want to apply for a payment holiday due to COVID-19, your credit file will not be affected. If your account is in arrears, the level of arrears will be reflected in your credit file, which may affect your credit score.

If you apply for a payment holiday for any other reason, or after the COVID-19 holiday cut-off date, it will be reflected on your credit file.

Will a payment holiday impact my ability to borrow in the future?

Some providers look at more than just your credit score to make a lending decision. Your financial history may tell them that you were on a payment holiday, which could influence their decision.

For example, someone’s credit file may show their mortgage balance increasing whilst their bank statements show no payments being made during that time.

Therefore, it’s possible that taking a payment holiday would impact your future borrowing ability.

About Dot Dot Loans

Here at Dot Dot, we offer loans from £200 up to £4000, subject to affordability. Our online loans come with fixed terms based on how much you want to borrow, allowing you to spread your repayment over several months. This makes your loan more manageable.

If you would like more information, check out our loans guide.

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