Does a mortgage holiday affect your credit rating?

A mortgage holiday is an arrangement made with your lender where they agree to pause part or all of your mortgage payments for a set period. 

Also called a “mortgage payment break” or “mortgage payment deferral”, you might consider asking for one if you’re struggling to keep up with your repayments or your income or employment situation changes. 

But does a mortgage holiday affect your credit rating? Can it impact your ability to borrow more in the future? And what are the alternatives to asking for a payment holiday? 

Let’s find out.

Does taking a mortgage holiday affect your credit rating? 

Yes, it can. But it’s not so clear-cut. There’s still a bit of confusion floating around regarding mortgage holidays and credit ratings — and it all stems from the COVID crisis.  

At the height of the pandemic, the UK government introduced an emergency mortgage holiday scheme to help homeowners financially affected by furlough and unemployment. The scheme ran from March 2020 until March 2021, and lenders agreed not to penalise borrowers during this time. 

So, if you took a mortgage holiday as part of this government-backed initiative, your credit score probably wasn’t affected. Instead, the payments were reported as paid on time.

However, now that we’re living in a post-pandemic world, we’re back to being at the mercy of mortgage lenders. This means they can once again choose to report a mortgage holiday as payments in arrears, which can damage your credit score. 

Bottom line: If you’re thinking of taking a payment holiday due to ill health, redundancy, or a change in circumstances, you’ll need to check with your lender to know whether your credit rating will be affected. Not all lenders will report your payment break as missed payments, but you must be clear on the consequences before you arrange one. 

Do not start missing payments without having an arrangement in place, as this will hurt your credit score and put your home at risk.

Can taking a mortgage holiday improve your credit score?

Possibly, though it’s not the best reason for taking one!

In theory, arranging a break from paying your mortgage could free up some cash to pay off other debts. As a result, you could feasibly boost your credit score in the short term.  

However, you need to remember that your mortgage payments will kick in again after the holiday is over — and depending on the agreement you’ve reached with your lender, they could be higher than before to offset the pause in payment. 

So, you’ll need to make sure you’ve not left yourself short of cash to resume paying your mortgage on time. Otherwise, you could miss payments, harm your credit rating, and put your home at risk of repossession. 

How mortgage holidays can affect your ability to borrow

Even if your mortgage holiday doesn’t appear on your credit report, it could still affect your ability to borrow in the future. Here’s how:

When you remortgage with a new lender or apply for a personal loan, they’ll check your credit report to determine the likelihood you’ll repay what you’ve borrowed on time, based on your credit history.

But they won’t stop their search there. Chances are you’ll have to supply bank statements as evidence of your income and outgoings as part of your application. Those statements could signify to a lender that you’re currently on—or have previously taken—a payment holiday if your mortgage payments are missing.

Some lenders may factor this into their lending decision, deciding to offer you less than you’ve asked for (or rejecting your application altogether) if they feel you can’t keep up with your repayments. 

How do I get a mortgage holiday? (Step by step)

Applying for a mortgage payment holiday is relatively straightforward. Most lenders will have a page on their website dedicated to payment holidays. Simply Google “lender name” + “payment holiday” to find the relevant information. You may even be able to request a mortgage holiday via your online banking account. 

Alternatively, you can follow these simple steps:

1. Call your lender and ask for a mortgage payment holiday. 

2. Explain your situation and why you’ve decided to make this request. 

3. Provide any evidence required to back up your claim. For example, some lenders may ask for bank statements or pay slips to prove your income has dropped. 

4. Finally, your lender will make a decision based on your circumstances. The length of a payment holiday is usually at the lender’s discretion.

Who is eligible for a mortgage holiday?

Every lender is different, so the criteria for mortgage holiday eligibility can vary. 

Often, you need to be up-to-date with your payments over a certain period before you can qualify for a payment break. And some lenders will only give you a mortgage holiday if the loan-to-value of your mortgage (the amount you owe versus the value of your home) is lower than 80%.

How to calculate loan-to-value (LTV): If your property is worth £200,000 and you currently owe £150,000 on your mortgage, your LTV would be 75% (150/200 x 100 = 75).

What happens at the end of a mortgage payment holiday?

When your payment holiday ends, your monthly mortgage payments will restart on the usual date (for example, the first of the month). However, your monthly payments going forward will be higher to make up for the “missed” payments and to cover the additional interest charged during the payment break.

Is taking a mortgage holiday a good idea? (Pros and cons)

As a short-term solution, there are a few pros to taking a mortgage payment holiday. However, there are some cons to be aware of, too. Let’s take a look at both: 

What are the advantages of mortgage holidays?

• Lifts financial stress: The main benefit of a mortgage payment break is that it relieves some financial stress — at least for a little while. This could give you the headspace needed to make positive changes regarding your finances and get things back on track. 

• Access more cash: A mortgage holiday could give you access to a little more cash to pay down or pay off other debts weighing heavy on your mind. Once you’re clear of those, you might find you’re ready to tackle your mortgage again. 

• Overcome a temporary drop in earnings: If you’re only dealing with a short-term drop in income, perhaps due to parental leave, a mortgage holiday can give you some breathing room until you’re back at work. 

What are the disadvantages of mortgage holidays?

• You’re still charged interest: The downside to taking a mortgage holiday is that you’re still being charged interest on your remaining mortgage balance. This means when you start making payments again, you’ll owe more than before the break. 

• Higher repayments once the holiday is over: Because you’re still being charged interest, your mortgage payments will be higher once the mortgage payment holiday is over. If your household income has been reduced permanently, you may find yourself worse off than before. 

• It could be reported on your credit report: Depending on the agreement with your lender, your payment holiday could be reported on your credit file. This could affect your ability to get credit further down the line.

What are the alternatives to taking a mortgage holiday?

If you’re struggling to make your repayments on time, a mortgage holiday will probably be used as a last resort. This is because your mortgage balance and payments will be higher once the break is over, and it could also impact your credit score. 

That’s why it's a good idea to discuss some mortgage holiday alternatives with your lender. Each of the following options could help you reduce your monthly payments without risking your credit rating (provided you continue to make your payments on time).

• Remortgage to a new deal: Switching to a new deal, either with your current lender or a new one, could help make your payments more manageable. Especially if you can remortgage to a lower interest rate, meaning you’d be paying out less each month overall. Just remember to check the T&Cs, as you may have to pay an Early Repayment Charge if you try to remortgage a fixed-rate deal early.

• Extend your mortgage term: Alternatively, you could ask your lender to extend your mortgage term (for example, from 25 to 30 years). This means you’d have longer to repay your home loan, and the monthly payments would be reduced. However, it also means the overall balance of the mortgage would increase in the long run, so it’s worth keeping that in mind.

• Switch to an interest-only mortgage: You could also switch to a different type of mortgage, such as an interest-only deal. This means the loan balance is paid in full at the end of the term, and you’d only be paying the interest on the loan each month. However, to qualify for this type of mortgage, you’ll need to prove that you can pay off the mortgage with one lump sum at the end of the term using savings, stocks and shares, or by selling other assets or property.

If you are interested in exploring any of these options, it's best to contact your mortgage provider directly.

To recap: Does a mortgage holiday affect your credit score?

Yes, a mortgage payment holiday can harm your credit score. Before applying for one, ask your lender if it will be reported on your credit report. Not all lenders will report it, but it’s crucial that you understand the impact of taking a payment break before you arrange one.

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