Mortgage payment holidays and payment plans

The pandemic-era mortgage payment deferrals, which were not reported as arrears, have ended. What exists now is ordinary forbearance. Under FCA rules and the Consumer Duty, your lender must treat you fairly if you are in payment difficulty, and it has a range of options including reduced payments, a full payment deferral, a term extension and a temporary switch to interest only. Any concession agreed now may be reported on your credit file, so ask how it will be recorded before you accept it.

This is the single most useful thing in this article. A conversation before a missed payment gives your lender far more options than a conversation after one. Lenders are required to treat customers in payment difficulty fairly and to consider forbearance, and they generally would rather agree an arrangement than manage arrears.

Call the mortgage or collections team and say plainly that you expect to struggle. Have your figures ready: income, essential outgoings, other debts and the reason for the shortfall. Whether the problem is temporary, such as illness, redundancy or a broken boiler, or permanent, such as a lasting income drop, matters a great deal to which option fits.

Ask for the outcome in writing and ask two specific questions. How will this be reported to the credit reference agencies? And what happens at the end of the arrangement to the payments I have not made?

• A full payment deferral. You pay nothing for an agreed period, often one to three months. The unpaid interest is added to the balance, so the debt grows and future payments rise.
• Reduced payments. You pay what you can afford for an agreed period. Often more sustainable than a full deferral and better received by lenders because it shows commitment.
• A term extension. Spreading the remaining balance over more years permanently lowers the monthly payment. Subject to the lender's maximum age policy.
• A temporary switch to interest only. You pay the interest but not the capital, so the balance stops reducing but does not grow. On a 200,000 pound balance at an illustrative 4.5 per cent over 20 years, the full payment is roughly 1,265 pounds and the interest only payment is roughly 750 pounds. That is a substantial saving with no compounding of unpaid interest.
• Capitalising arrears. Existing arrears are absorbed into the balance and repaid over the remaining term.
• A payment arrangement. A structured plan to clear arrears over time alongside the normal payment.

Which of these is right depends on whether the problem is temporary or structural. Temporary problems suit deferrals and short reduced-payment periods. Structural problems suit term extensions, because they solve the payment level permanently rather than pushing a shortfall forward.

Be clear-eyed about this. The specific protection during the pandemic, where deferrals were not recorded as missed payments, no longer applies. A forbearance arrangement agreed today is likely to appear on your credit file, commonly as an arrangement to pay marker or as reduced or missed payment markers, depending on how the lender records it.

Adverse entries stay on your credit file for six years from the date of default or settlement. There is no single national credit score that lenders share. Each lender combines credit reference agency data with its own scorecard and policy rules, so the same file can be read very differently by two lenders.

The practical effect is that a period of arrangement can make remortgaging harder for a while, and may push you toward specialist lenders at higher rates. That is a real cost. But it is a much smaller cost than actual arrears, and vastly smaller than possession proceedings. If you genuinely cannot pay, the credit file consequence is not a reason to avoid the conversation.

Do ask the exact wording. There is a meaningful difference in how lenders read an arrangement to pay marker versus a formal default, and it is worth knowing which you are accepting.

1. Work out your actual monthly shortfall. Not an estimate. Write down income and every essential outgoing. 2. Check whether you have payment protection cover. Some mortgage protection, accident sickness and unemployment policies, and some employment benefits will pay out and people forget they have them. 3. Check your benefit entitlement. Many households in difficulty are not claiming what they are owed. Use a free entitlement calculator. 4. Contact your mortgage lender before missing a payment. 5. Contact a free debt advice charity in parallel. Do not wait until you have exhausted the lender conversation. 6. Prioritise your debts correctly. Mortgage, rent, council tax, energy and court fines are priority debts because the consequences of not paying are severe. Credit cards and personal loans are non-priority. Never pay a credit card at the expense of your mortgage.

Support for Mortgage Interest, or SMI, helps with the interest on your mortgage if you are receiving certain qualifying benefits, which include Universal Credit, Pension Credit, income-based Jobseeker's Allowance, income-related Employment and Support Allowance and Income Support.

Two things matter about SMI. First, it is a loan, not a grant. It is repaid with interest when you sell the property or transfer ownership, and it is secured by a charge on your home. Second, it covers interest only, up to a capital limit and calculated using a standard rate set by the government rather than your actual rate, so it may not cover your full interest.

There is normally a waiting period before payments start, and eligibility rules for Universal Credit claimants have changed over time. Check the current rules on GOV.UK or through MoneyHelper rather than relying on older guidance. Despite being a loan, SMI is frequently worth taking, because it keeps you in your home.

You never need to pay for debt advice. These organisations are free, and using them is not recorded against you.

• MoneyHelper, the government-backed service, for impartial guidance on mortgages, benefits and debt.
• StepChange Debt Charity, for full debt advice and managed debt solutions.
• Citizens Advice, for face-to-face and phone help, including benefit checks and help with priority debts.
• National Debtline, for free confidential telephone and online debt advice.
• Shelter, if possession proceedings have started or your home is at risk.

Avoid commercial companies that charge for debt management when the charities do the same work for nothing. Be sceptical of anyone who contacts you unprompted offering to write off your debts.

If your lender has started possession proceedings, get advice immediately from Shelter or Citizens Advice. Courts generally expect lenders to have followed a pre-action protocol and to treat possession as a last resort, and a realistic proposal to clear arrears can often stop or suspend an order. Do not stop opening the post. Almost every option gets worse the longer it is left.

Once you are back on stable ground and any markers have aged, it is worth having your options reviewed properly. The MortgageMatch directory can help you find an FCA-authorised broker familiar with lenders that consider applicants with a history of arrangements.