Martin Lewis: Payment holidays extended – but should you take one? Mortgages, credit cards, loans, payday loans, car finance and more
Update Tue 21 Jul: Within the last few weeks, we've seen regulator the Financial Conduct Authority extend coronavirus payment holidays for mortgages, credit cards, personal loans, car finance, payday loans and overdraft help to 31 October 2020. The regulator's other help schemes are also likely to be extended too, yet should you do it?
What is a payment holiday?
A payment holiday isn't really the best name, a repayment deferral would probably be more accurate. All it means is you don't need to make payments for the time being, but you will later, and interest still racks up even while you're not repaying.
Payment holidays have always been something that customers can request. However, during the pandemic regulator the Financial Conduct Authority (FCA) has put specific rules in place that force financial institutions to offer a range of specific payment holidays with defined terms, to help those who are struggling due to the financial knock-on impact of coronavirus.
Yet these are far from a no-brainer, in fact I have a simple rule for payment holidays...
'If you NEED one, take it, but ONLY take it if you need it'
That's because, while a payment holiday is a good financial break and, if you're struggling with other bills, it's better than missing payments without an agreement, there are some real consequences to it:
- Interest racks up. Most of these products are debt products. Interest isn't frozen (with the exception of payday loan holidays), so it still racks up over the period. Normally you make repayments that lower the amount owed and reduce the interest, yet the fact you're not paying while the interest still accrues means it will cost you more.
- It may affect your ability to get future credit. When the coronavirus payment holidays were first launched, the FCA and Chancellor were keen to note that it wouldn't go on your credit file, nor impact your future chances of getting credit.
Yet while it isn't on your credit files as I revealed in mid-May, lenders can negatively assess you if you've had a payment holiday. They can find out if you've taken one via application forms, Open Banking or just from looking at your payment history.
And the FCA has confirmed it's legit for them to do so. In fact, its recent 'payment holiday extension' announcements have explicitly warned of this impact. So, especially if you've an important application due like a mortgage application, think very carefully before taking a payment holiday.
Now let me briefly take you through each payment holiday in turn. Most have now been extended until 31 October 2020, if not, I expect them to be. Of course, we don't know what will happen after that, but the current plan is for these special facilities to end then.
Mortgage payment holidays are available until 31 October 2020
Mortgage payment holidays have been extended until 31 October 2020, meaning you can get it for the first time till then, and you can ask for an extension if your first mortgage payment holiday has ended.
Let's take someone on a £700/month mortgage with 20 years to go. When the holiday ends, they'll have 19 years and six months left to go, and will repay £725/mth – not a big hike and certainly worth doing if you need to.
Yet the higher the interest rate and the shorter time left (so less time to spread the cost), the bigger the cost jump. Someone with a £700/mth mortgage who only had 12 months to go would be paying £1,425/mth for the remaining six months when their holiday ends. To see the likely impact on yours, use a mortgage payment holiday calculator.
Credit card and loan holidays are available until 31 October 2020
On Friday 3 July, we saw the start of extensions for credit cards, personal loans and catalogue debt, also to 31 October 2020 – meaning that you can apply for your first three-month payment holiday until then, or if you'd had a payment holiday and need to extend it you can.
If you're already on a payment holiday and still struggling to make payments, firms will provide you with additional support, which could include freezing or reducing payments to a level you can afford for three months. If you haven't applied for a payment holiday yet, you can do so until 31 October 2020.
I'm more concerned about people taking these than mortgage holidays, because the interest is usually higher, so missing payments is worse. If you can, do use our 0% balance transfer eligibility calculator to see if you can shift your debt to a cheaper card before doing a payment holiday, as then no interest would be racking up.
If not, if you could take a mortgage holiday and use the money to pay your credit cards, for most that adds up. Just ensure that, when you can, you overpay the mortgage to make up for it – otherwise you'd be spreading the cost over a long period, which could be expensive (the relative impact of each action on future applications is still unknown, but it is worth being aware that it's possible mortgage payment holidays could be seen as more substantial).
At the start of the coronavirus pandemic, banks were instructed by the regulator to give everyone struggling up to the first £500 of their overdraft interest-free. On Friday 3 July, this too was extended until 31 October 2020.
Yet while before that point most banks were automatically giving up to £500 fee-free to everyone, now many are making it only for those who are struggling and who request it. Halifax, Lloyds, Bank of Scotland, and TSB have all already done that and Santander and Nationwide are due to end it in the next couple of weeks. So if you need it, ask.
Plus back in April, after a regulatory change, almost all banks' overdraft rates were set to be a hideous 40% APR – double a high-street credit card, making overdrafts the new danger debt (see my 40% overdrafts warning from the time).
When the pandemic started, the FCA put a temporary halt on these cost changes and said for three months no one would pay more under the new 40% cost system than before. When the overdraft help was extended, that 'no one should pay more' has become 'no one struggling from the pandemic should pay more'.
And indeed we’ve already seen Bank of Scotland, Halifax, Lloyds and TSB reintroduce their 40% overdrafts and Nationwide and Santander are planning to soon. So if that means you'll pay more, and you're struggling due to the financial impact of coronavirus, speak to your lender to get it lowered.
Car finance, pawnbroking and buy-now-pay-later holidays is extended to 31 October 2020
On Friday 17 July, after a short consultation, new rules by the FCA which extends payment holidays for car finance, pawnbroking, buy-now-pay-later and rent-to-own, until 31 October 2020, came into force.
So, if you've a car loan, PCP, leasing or HP deal and are struggling to pay due to coronavirus, you can get a new three-month payment holiday on request or extend your existing one by a further three months.
Alternatively, your lender will also be able to reduce your monthly payments to an affordable level for three months or you can ask for a partial payment holiday. It also means they can't repossess cars for non-payment until 31 October 2020.
Payday loan payment and interest holidays extended until 31 October 2020
As with car finance above, payday loans have also been extended till 31 October. Uniquely, those struggling due to the financial impact of coronavirus can get a one-month payment and interest holiday, which frankly is a no-brainer.
The deadline to apply, like other borrowing products, has been extended to 31 October 2020. But unlike other products, if you're already on a payment holiday you won't be able to ask to extend it. Instead, the lender may offer help in a different way. For example, the lender can accept token payments, agree a repayment plan, or reduce or waive interest while the customer repays.
Home and car insurance monthly payments currently due to end on 18 August 2020, but very likely to be extended too
If you pay car or home insurance monthly, it's actually a loan – they loan you the annual cost of the insurance and charge you interest on top (far best to avoid doing this if you can). Currently, the date to apply until is 18 August 2020, but I suspect in the future we'll hear this is being extended until 31 October 2020 too (the link above will be updated).
If you're still struggling to pay monthly premiums, the insurer should look at offering a payment holiday or at least other help or forbearance. They should also reassess the level of cover you need and remove unneeded extras to bring the premium down.
Individual voluntary arrangements payment holiday until 20 October 2020
This is the only rule that isn't imposed by the FCA, instead it's down to the Insolvency Service. If you've an Individual Voluntary Arrangement (IVA) – which is a debt management solution – until 20 October 2020 you can now ask your supervisor directly to approve up to an extra three months of payment breaks (usually, your supervisor needs to ask your creditors first, which can be a slow process, and normally you can take up to nine months during the term of the IVA).
They can also approve a reduction in your monthly payments by 25% (the standard variation is 15%). If you take a payment break, the extra months will be added on to the end of your IVA term, so it may last longer than the standard five years in your case.
As this is by a different regulator, I don't expect to see an extension.
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