All about Payment Holidays: Defin­i­tion and Ap­plic­a­tion

A payment holiday is an agreement you make with a lender (e.g. bank) to suspend your monthly re-payments for an agreed period of time. For example, if you’re facing un­ex­pec­ted financial hardship, you may be able to agree to a payment holiday to pause payments for a while until you get back on track. Payment holidays usually apply to mortgage payments and loan payments. Not all agree­ments allow for payment holidays, but in ex­cep­tion­al cir­cum­stances you may still be able to get one, as during the Coronavir­us pandemic which began in early 2020. This article will look at payment holidays during ‘normal’ times, as well as the newer reg­u­la­tions and guidelines which were set up in early 2020 as a result of the Coronavir­us pandemic.

How to get a payment holiday, tips for applying and finding out the dif­fer­ence between deferment of payment and payment holidays: All these topics will be covered in this article, as well as ad­dress­ing whether payment holidays have an effect on your credit score.

There are three main factors which will influence whether your ap­plic­a­tion for a payment holiday will be suc­cess­ful. Firstly, it depends on the type of contract you have. Secondly, who your lender is will also be an influence in the process. Finally, your financial situation will be a big factor in making this ap­plic­a­tion.

People who are eligible for payment holidays are those who will have overpaid on re­pay­ments in the past, such as over­pay­ing their mortgage. What this means is that if you’ve pre­vi­ously built up good credit by paying off more than your monthly contract requires, you’ll be eligible for a payment holiday. If you’re in arrears, it is unlikely you’ll be granted a payment holiday. Don’t worry if you haven’t made over­pay­ments though, as cir­cum­stance is also a factor that lenders will take into con­sid­er­a­tion when reviewing a payment holiday ap­plic­a­tion.

Cir­cum­stances that have an effect on your finances, such as being made redundant, being put on temporary leave or furlough, or going on maternity leave, are cir­cum­stances that many lenders will accept as fair reasons for needing to take a break from re-paying debts. There are, of course, several other cir­cum­stances which may result in you having to readjust your finances, so the best thing to do is to get in touch with the in­sti­tu­tion you have a contract with and ask them.

A payment holiday is usually used to refer to a pause in payments made towards a loan or mortgage repayment. Credit card re­pay­ments are also often paused with a payment holiday. However, during the Coronavir­us pandemic, the FCA released a set of guidelines for many more types of lender. Buy-Now-Pay-Later, Rent-to-Own, and pawn­brok­ing customers must all be eligible for a three month payment holiday. However, other monthly payment contracts such as energy bills, internet and phone bills, and rent in case you’re a tenant have not been made eligible for payment holidays during the Coronavir­us crisis. It is unclear what the reg­u­la­tions will be in the future, and how long these cir­cum­stances will go on.

A deferment of payment is a term used to defer self-as­sess­ment and VAT payments for busi­nesses and the self-employed. Whilst both terms refer to delaying a regular payment, deferment of payment is used for gov­ern­ment­al purposes, such as tax purposes, and payment holidays is the term used with private in­sti­tu­tions, such as banks. In face of the Coronavir­us pandemic in early 2020, the UK gov­ern­ment announced a plan to allow all busi­nesses to defer their VAT payments, and for the self-employed to postpone their second payment on account for the year 2020. You can read more about this topic in our article on deferment of payment.

Just like deferment of payment discussed above, a payment holiday might not be the right choice for everyone. Despite its appealing name, the payment holidays can have some tricky con­sequences, and so shouldn’t be used as a way to save cash say, for a real holiday you want to go on. We’ll take a look at the ad­vant­ages and dis­ad­vant­ages of payment holidays.

• Ease the financial strain: If you’re in a temporary financial rut, a payment holiday might just be the right thing for you and your family.
• Out of mind: Whilst the pause on payment is temporary, it’ll give you more time and energy to focus on getting back on track fin­an­cially without worrying about the money for the time period of the payment holiday.

• Kicking the can down the road: If you’re going to be earning less for a sub­stan­tial amount of time, and will not return to your previous income level, a payment holiday may not be suitable because you’re not ceasing payments, you’re only delaying them.
• Increase in debt: A payment holiday will continue to increase interest, and you risk having to make higher payments in the future. On their webpage on payment holidays, HSBC warn those applying for a payment holiday that: “Interest will continue to be charged during the payment holiday, […] the total amount you owe us on your mortgage will increase and […] your monthly payments may increase when the payment holiday comes to an end.” These risks are only worth taking if a payment holiday is a last resort.
• A new normal: The point of a payment holiday is to relieve pressure during an ex­cep­tion­al time. However, a payment holiday can last up to twelve months, during which time you may adjust to a new normal. Returning to making your regular payments could mean that the financial stress which caused you to take a payment holiday returns when you have to start making payments again. Getting used to paying less is easy, getting used to paying more again is not.

One final dis­ad­vant­age to payment holidays is their effect on credit scores. This is always a big question for those con­sid­er­ing a payment holiday, and depending on your provider and the cir­cum­stances under which you take a payment holiday, it may affect your credit score.

You’re may not have a good credit score if you’ve never been in debt. That’s because there is no proof that you keep to your repayment agreement and make payments on time. That is, very roughly speaking, how credit scores work. It should be noted that it is a lot more complex than this, but it gives an in­tro­duct­ory insight. If you have to pause your repayment because you can no longer afford to make re­pay­ments or payments towards bills, for example, this may affect your credit score because you are not keeping to the normal terms of your contract. This would therefore affect your credit score.

However, in light of the Coronavir­us pandemic, lots of in­sti­tu­tions were en­cour­aged to enable something called a payment freeze. This means that credit scores would be frozen at their current level during any payment holidays. Ensure that your in­sti­tu­tion has this policy so you don’t face a nasty shock down the line.

As mentioned in various sections of this article, the Coronavir­us pandemic has changed the norms of payment holidays for the time being. The FCA en­cour­aged lenders to allow people to take payment holidays without having this affect their credit score, and to relax the strict­ness of who is eligible for a payment holiday – in some cases you won’t need to prove you’re strug­gling to get a payment holiday.

As mentioned above, payment holidays are not always the best option, but some of the dis­ad­vant­ages of payment holidays have changed due to the new situation. So what is new to the world of payment holidays because of Coronavir­us?

• Car finance: You can now get support with car finance plans. You can now take a three month payment holiday for a car finance plan, and your provider must treat you fairly and not take advantage of the fact that payments may be delayed. This means not charging extra for late payments, and in case a payment holiday isn’t suitable, an al­tern­at­ive should be made possible. There have been some reports that it has been difficult for borrowers to take advantage of this new scheme, so ensure you don’t rely on this to take effect im­me­di­ately.
• Loans and Credit Cards: Credit and loan in­sti­tu­tions were ordered to allow their customers to take three month loan payment holidays. These holidays should be interest free, and to make things go as smoothly as possible, you shouldn’t have to prove you’re strug­gling to take this payment holiday. There is a com­par­is­on table of the in­sti­tu­tions offering loan help at money­saving­ex­pert.com.

• Mortgages: Banks are not obliged to offer mortgage payment holidays during this time. However, many have stated that they will show tolerance and offer help to those who are strug­gling to make payments at this time. By the end of April 2020, 1.6 million mortgage holders had been granted a payment holiday due to Coronavir­us. Your re­pay­ments will either be increased, or your repayment term will be increased, depending on the agreement you reach with your provider about how to proceed after the payment holiday.
• Interest: Although credit scores remain un­af­fected, interest will still be charged on debts that are being repaid in general. This means you’ll end up paying a bit more if you choose to take a payment holiday.

If you don’t want to take a payment holiday, you can consider changing your financial ob­lig­a­tions in other ways. For example, switching to an interest only loan could save you a lot of money in terms of how much you need to pay a month – that will not decrease the amount you have to pay overall, however. You can also opt to make this switch for a limited time period, instead of making the switch permanent. Al­tern­at­ively, if you’re strug­gling with mortgage re­pay­ments, you may be able to extend the duration of your repayment agreement. This means you would pay less per month, but for longer.

Please note the legal dis­claim­er relating to this article.