Martin Lewis: Payment holidays coming to an end – but should you take one? Mortgages, credit cards, loans, payday loans, car finance and more
Update Tue 5 Jan: This blog was originally written in July 2020. While the regulator the Financial Conduct Authority has extended payment holidays a number of times, most recently in November 2020, it hasn't (yet) mentioned anything about further extensions since the current lockdowns. So I've included the most recent information in 'red' updates.
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 long had 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 still isn't reported on your credit files [and this is the case for the payment holiday extensions], 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 'payment holiday extension' announcements in July and August 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.
However, thankfully in practice, we've seen that once people finish these specific coronavirus payment holidays, and they've resumed normal repayments, most lenders are not harshly scoring people down for the payment holidays (though it's unlikely you'll be able to get a new product of the same type while you're on a payment holiday).
What payment holidays are available until 31 Oct?
There's a whole range of payment holidays and almost all have had their deadlines move, to now end on the same date, 31 October 2020. There are still help-provisions available after that but they're not as strong (I explain more below). Here's what help is currently on.
- Mortgages. Blanket mortgage payment holidays for everyone are due to end on 31 October 2020. Apply before then and it will last for three months. You can also ask for an extension if your first mortgage payment holiday has ended – though if your lender thinks this will land you in more financial difficulty, it could deny a full mortgage payment holiday and instead offer other help, such as freezing interest.
[Update Tue 5 Jan: In November the regulator confirmed... those who have not had a payment holiday yet will be able to request one until 31 March 2021 and get a near-automatic three months, then extend for another three months. Those who have had a payment holiday, or are currently on one, will be able to restart it or extend it up to a maximum total of six months. Neither of these will appear on your credit file.
If you're still struggling and have already had a six-month payment holiday, your lender may be able to offer you more tailored support, such as freezing interest or an extension to your mortgage term, though this WILL be recorded on your credit file, and could affect your chances of getting future credit – so be careful.]
To show the impact of taking one of these, someone paying £600/month on a mortgage with a 12-year term remaining who takes a three-month holiday will typically have 11 years nine months to repay at £616/month. The shorter the remaining term, the bigger the impact – with little time left, it can be a huge jump. To see the likely impact on yours, use a Mortgage Payment Holiday Calculator.
- Credit card and loan holidays. Payment holidays for credit cards, personal loans and catalogue debt are also due to end on 31 October 2020 – meaning 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.
[Update Tue 5 Jan: In November the regulator confirmed an extension until 31 March 2021.
So borrowers who have not yet had a payment holiday will be able to request a three-month holiday up until 31 March 2021. Those who have already had or are on a payment holiday will be able to 'top up' to a total of six months of payment holidays. These will not go on your credit file.
If you've already had a six-month payment holiday you'll be offered "tailored support", which CAN then be recorded on your credit file. So be careful.]
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 off 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).
- Overdraft help. At the start of the coronavirus pandemic, the regulator instructed banks to give everyone struggling up to the first £500 of their overdraft interest-free. In July this was extended until 31 October 2020, so it's due to come to an end.
Yet while before July, 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. So, if you need it, ask. You should get this for three months from the day you ask, even if that is 30 October.
Plus, 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 seen banks, including Bank of Scotland, Halifax, Lloyds, TSB, Nationwide and Santander, reintroduce their 40% overdrafts since July. 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.
[Update Tue 5 Jan: In November, details on more help for overdrafts were pointedly absent from the regulator's statements. This doesn't seem right to me. Yet while I pushed on it, it doesn't look like it's changing.
While general support has ended with most banks, four (Bank of Scotland, Halifax, Lloyds and Santander) have extended help to those struggling by allowing customers to apply for an up-to-£500 interest-free overdraft buffer for three months – this ends with all four banks on Sunday 31 January.]
- Car finance, pawnbroking and buy-now-pay-later holidays. Payment holidays for car finance, pawnbroking, buy-now-pay-later and rent-to-own are due to come to an end on 31 October 2020.
So if you've a car loan, PCP, leasing or HP deal and are struggling to pay due to coronavirus, apply soon and you can get a new three-month payment holiday on request or extend your existing one by a further three months till then.
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.
The payment holidays also apply to pawnbroking, buy-now-pay-later and rent-to-own. For more info on all of these see car finance, pawnbroking, buy-now-pay-later and rent-to-own.
[Update Tue 5 Jan: In November the regulator confirmed an extension for car finance, pawnbroking and buy-now-pay-later loans, for those who haven't yet had one, or who are currently on their first payment holiday.
Borrowers who have not yet had a payment holiday will be able to request one up until 31 March 2021, or if you're on your first payment holiday and it ends after 31 March, you'll be able to extend it. This won't affect your credit file.
Borrowers who have already had or are on a payment holiday will be able to 'top up' to a total of six months of payment holidays].
- Payday loan payment and interest holidays. As with car finance above, payday loan payment holidays will come to an end for everyone on 31 October. Uniquely, those struggling due to the financial impact of coronavirus can apply for a one-month payment and interest holiday before then, which frankly is a no-brainer.
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.
[Update Tue 5 Jan: If you've not yet taken a payment holiday you can still apply for one any time before 31 March 2021. It will last for one month, and can't be extended. Plus, while you're on the payment holiday, the lender can't charge interest. This WON'T go on your credit file.
If you have already had a payment holiday on your payday loan, you can ask for tailored support. This WILL go on your credit file.]
- Home and car insurance monthly payments. 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 better to avoid this if you can).
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. The date to apply for this help is, you've guessed it, 31 October 2020. It should also reassess the level of cover you need and remove unneeded extras to bring the premium down.
[Update Tue 5 Jan: There's been no formal extension to payment holidays for insurance products, but if you're struggling to pay, lenders can offer tailored support if you still need it, but it will be recorded on your credit file. I don't imagine there will be any updates to this, but if there are we'll report on them in the free MSE weekly email and in this blog.]
- Individual voluntary arrangement payment holidays due to end April 2021. This 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 – previously you had until 20 October 2020 to 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.) This has now been extended until 20 April 2021. [Nothing has changed here.]
Your IVA supervisor can now approve up to six months of payment breaks, and approve a reduction in your monthly payments by up to 50% (it was 25% previously, the standard variation is 15%). If you take a payment break, the extra months will be added to the end of your IVA term, so it may last longer than the standard five years in your case.
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