payment holiday

Mortgage Payment Holidays – Is It Wise To Take Them?

If I was to offer you the chance to take a holiday from paying your mortgage for a few months would that sound attractive to you?

Many mortgage and loan agreements actually have this option built in. If this is the case you are often after a specified period of time, entiltiled to take a “holiday” of a month or more from paying your mortgage or loan. As attractive as this sounds is it really wise to take these payment holidays? What are the potential downsides to taking them?

Is it really a mortgage FREE month?

The first thing to realise is that a mortgage payment holiday isn’t exactly what it’s made out to be! The term ‘payment holiday’ makes it sound like you are getting something for nothing. It sounds like the mortgage lender has decided to let you off completely from paying your mortgage for a month or two. This is not the case at all!

When you borrow money by taking out a mortgage, you agree to make a monthly repayment on that mortgage every month. A good chunk of this payment is the interest you pay on the loan. No lender in their right mind is going to let you off paying the interest for a month as this is how they make their money! So if you’re not making the monthly interest repayment, how does it get paid?

Increasing your mortgage!

Usually the interest from the monthly payment you’ve decided to take as a payment holiday gets added to your mortgage. If you’ve ever taken one of these holidays or inquired about it, you’ll have noticed that it adds a few pounds a month to your future mortgage payments. This is because the interest you don’t pay when you take a payment holiday get’s added to your outstanding mortgage. As a result your monthly payment now increases due to the fact that:

a) You still need to repay the bigger mortgage loan over the same length of time – 25 years for example

b) You’re now paying interest on a bigger mortgage!

But it’s just a couple of pounds extra a month! What’s the big deal?

Taking one mortgage payment holiday over the entire term of a 25 year mortgage loan is unlikely to cause a big issue. If you get into the habit of regularly taking them however, it could cause you big problems in the future!

As you can see from the graph above, during the early years of a mortgage most of the money you pay to your lender in your mortgage payment is used to pay the interest on the loan. Very little of the money goes towards reducing what you owe! If you get into the habit of taking payment holidays, any inroads you’ve made into paying off the amount you owe on your mortgage can be quickly undone.

But If I’m Still Repaying My Mortgage Over The Same Term, Why does it matter?

If you never move home or remortgage and are happy to pay the extra money on the mortgage payment each month, then you’re right it won’t matter. You’ll still repay your mortgage on time.

The fact is most people move home or re-mortgage a few times within their lifetime! To get the best mortgage deals or even to make a potential move possible, it is very important that you’ve paid off as much of the capital on your outstanding mortgage as possible! If you keep taking payment holidays, especially in these early years when you don’t reduce what’s owed on your mortgage by very much, it could make things very difficult if you decide to move or remortgage your home.

You could even find yourself in negative equity if you keep adding the interest from these payment holidays to your outstanding mortgage balance and house prices take a nose dive!

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8 Responses to Mortgage Payment Holidays – Is It Wise To Take Them?

  1. bogofdebt says:

    I had a credit card offer to not let me pay for the Christmas season once–thankfully I had already made an online payment or no doubt I would have taken them up on it. (I was in my bad finaical planning stage of life) It’s one of the things that I’m glad I didn’t do!
    bogofdebt recently posted..Spending Recap 7/9-7/15My Profile

    • Adam Buller says:

      yeah there’s no such thing as a free lunch! You’ll always have to pay for it somewhere down the line. When a financial organisation seems to be doing me a favour I’m always sceptical!

  2. I think if I had to and there was an emergency and I had no means to pay my mortgage payment then I would. If that wasn’t the case then I wouldn’t. There’s no sense in prolonging the inevitable. If it’s the case where I simply don’t have emergency savings and I had to take the mortgage vacation then I would be rethinking priorities and getting the fund rolling. When I had my houses in the UK I had this option and never used it. I see this on the television often, take a mortgage vacation and buy that lawnmower you always dreamed of or take that vacation lol.. ya!
    Cheers mate,
    Canadianbudgetbinder recently posted..How to Start Saving Money on Groceries in CanadaMy Profile

    • Money Bulldog says:

      I’d agree with that, If I had no other choice it’s definately better than missing a payment. I’d never take one to buy something or go on holiday though. Why pay interest on a lawnmower or holiday for the next 25 years?!

  3. I’ve never heard of a mortgage holiday until I read this post. You are definitely right, it does sound too good to be true…there has to be a catch if banks are trying to “help” out. I think the only time I would do this is if I am in a dire emergency situation.
    LifeInTransition recently posted..The Job Search Part I:Reasons for Leaving My Current JobMy Profile

    • Money Bulldog says:

      Yeah I’m not against taking one if you have no other choice, that’s perfectly reasonable. Even then it’s still wise to be sure you don’t fall into the trap of relying on them as a way out of financial problems.The debt is still there it’s just in a different place waiting to cause future problems!

  4. The government here offered me this kind of thing on my student loan when money was tight. I really felt like I needed the breathing room. So I gladly took it. Thinking back I’m sure the interest was still racking up during that ‘holiday’.
    Jeremy @ Modest Money recently posted..Top 5 Tips for Getting the Best Car Financing RatesMy Profile

    • Money Bulldog says:

      Probably and you end up paying more at the end of the day! I do understand that sometimes it has to be done, it’s just better avoided if at all possible.

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