Everything you need to know about payment holidays
On Friday new rules allowing credit cards and personal loan payment holiday extensions came into force. Plus, the regulator announced proposals to do the same with car finance and payday loans - we’ve already had similar announcements for mortgages. So what payment holidays are available, and should you take them? Who better to ask than our Money Saving Expert, Martin Lewis.For full details and technical help see Martin’s full Coronavirus finances and bills help guide.
What is a payment holiday?
A payment holiday simply means that you don’t have to make your regular repayments – though the costs and the interest still rack up and you have to pay it all back later.During coronavirus we’ve seen the regulator the FCA create rules that force banks to put in place certain payment holidays, upon request, for those struggling due to the financial knock on effects of coronavirus.
For these payment holidays, or part payment holidays, which are allowed, you don’t need to make repayments, and any missed payments won’t be recorded on your credit file either.Though that doesn’t mean it can’t impact future credit applications, as I revealed about six weeks ago lenders have ways (via open banking, application forms, and repayment history) to see if you’ve taken a holiday – and the FCA has confirmed they are allowed to do this.
Let’s start with the big one mortgages, how long have you got and how much will it cost?
Mortgage payment holidays have been extended until 31 October, meaning both that 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/mth mortgage with 20 years to go. When the holiday ends they’ll have 19 years and 6 months left to go, and will repay £725/mth – not a big hike and certainly worth doing if you need.Yet the higher the interest rate and the shorter time left (so less time to spread the cost) the bigger the cost jump. For someone with a £700/mth mortgage who only had 12 months to go, would be paying £1,415/mth for the remaining six months when their holiday ends.
And credit card and loan holidays have been extended too haven’t they?
Yes, on Friday we saw the start of extensions for credit cards, personal loans and catalogue debt, also to 31 October.If you’re already on a payment holiday and you’re 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 yet applied for a payment holiday you can do so until 31 October.I’m more concerned about people taking these than mortgage holidays, because the interest is usually higher, so missing payments is worse. In fact, if you could take a mortgage holiday and use the money to pay your credit cards, for most that adds up (just ensure when you can you over pay the mortgage to make up for it).What about those with an overdraft?At the start of coronavirus, banks were instructed by the regulator to give everyone struggling up to the first £500 of their overdraft interest free. This too has been extended until 31 October, some banks do it automatically, with others you can request it.
Yet one change here, in April overdraft costs were going to skyrocket to 40%. But 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. With the extension that happened on Friday, that ‘no one should pay more’ now only applies to those who are struggling due to the pandemic.
Car finance too is likely to be extended?Yes. With car finance, pawnbroking, buy-now-pay-later and rent to own, on Friday the regulator announced proposals to extend this help until 31 October, these proposals will be rapidly consulted on - with the consultation due to end tonight (Monday 6 July) - and it's likely these measures will be rubber stamped over the next couple of weeks, meaning they'll be in force around mid-July.If you've a car loan, PCP, leasing or HP deal and are struggling to pay due to coronavirus, you can get a new or extended 3 month payment holidays on request. They can't repossess cars for non-payment until 31 October.
The payment holidays also apply to pawnbroking, buy-now-pay-later and rent to own.
With payday loans uniquely you can get one-month payment and interest holiday, so it’s a no brainer, if you need it do it – though the deadline on this hasn’t been extended, but if you need help they should look at other options to help.Are there any more?
Yes…Home and car insurance monthly costs until 18 August. 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). I suspect in the future we’ll hear this is being extended until 31 Oct too.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 down the premium.
Individual voluntary arrangements. Until 20 October (this comes from a different regulator so I don’t expect an extension), if you’ve an IVA, you can ask your supervisor to approve up to an extra three months of payment breaks (usually 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.