The Pros and Cons of an Interest-only Mortgage Holiday

Life doesn’t always go according to plan. Additional expenses, reduced income, and rising costs can all make keeping up with your mortgage payments a challenge. If you’re feeling the pinch, you might be considering an interest-only mortgage holiday as a short-term solution. But is it the right choice for you? And will it affect your credit score? Let’s break it down. 

What is an interest-only mortgage holiday? 

An interest-only mortgage holiday allows you to temporarily reduce your payments by covering just the interest on your loan, rather than the full repayment amount. This can ease financial pressure by lowering your monthly outgoings. However, while this might sound like a lifeline, it’s essential to weigh the benefits and potential risks carefully.  

The Pros 

1. Breathing room for your budget: Switching to interest-only payments can free up cash for essential expenses, like the weekly food shop, utility bills, petrol, etc. It’s especially helpful if your financial struggles are temporary, such as waiting for a new job to start or dealing with unexpected bills. 

2. Avoid missing payments: Falling behind on your mortgage can lead to penalties, harm your credit score, or even put your home at risk. An interest-only holiday could help you stay on track and maintain your financial credibility. 

3. Buy yourself some time: An interest-only mortgage holiday can relieve stress, albeit temporarily, and could give you the headspace needed to make positive changes to your finances. 

The Cons 

1. You’re not reducing your debt: While you’re covering the interest, the actual amount you owe (the principal) remains untouched. This means you’ll be paying off your mortgage for longer. 

2. It costs more in the long run: Since your debt isn’t decreasing, you’ll pay more interest over the life of your mortgage. That’s something to keep in mind if you’re already feeling stretched. If your income has taken a hit permanently, you could find yourself worse off than before. 

3. It’s a temporary fix: An interest-only holiday is a short-term solution. If your financial difficulties don’t go away, you’ll might need to explore other options, such as remortgaging, extending your mortgage term, downsizing, or seeking debt advice. 

4. It could impact your credit score: While arranging an interest-only holiday shouldn’t directly harm your credit score, it could be reported on your credit file, so lenders may take it into account when assessing future borrowing. This could make it harder to access credit down the line. 

Should you take an interest-only mortgage holiday? 

The answer depends on your circumstances.  Is your financial difficulty temporary? If so, an interest-only holiday might help you weather the storm.  Can you catch up later? Keep in mind that you’ll need to resume full payments – and possibly higher ones – once the holiday ends. 

Have you explored other options? Speaking to a financial adviser or mortgage broker can help you understand your alternatives. 

Know your numbers 

If you’re struggling to keep up with your mortgage payments, don’t bury your head in the sand. Start by checking your credit report to get a clear view of your financial health and how lenders might view you. 

At Checkmyfile, you get the most detailed credit report out there. We put all your information from the UK’s three main credit reference agencies (Experian, Equifax, and TransUnion) in one place. Start your 30-day free trial today, then it’s just £14.99 a month. Cancel online anytime.  

Once you know where you stand, reach out to your lender as soon as possible. They’re often more willing to help than you might think, and taking proactive steps shows you’re serious about managing your finances. 

An interest-only mortgage holiday can be a valuable tool – but it’s not a cure-all. If you use it, make sure you have a plan for what comes next. 

Read more about the relationship between mortgage holidays and credit scores here.