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How might a mortgage payment holiday affect my credit score?

How might a mortgage payment holiday affect my credit score?
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The deadline for applying for a mortgage payment holiday is fast approaching. The option was introduced to help customers struggling to make their repayments because of coronavirus. Payment holidays have given borrowers a little bit of breathing room while times have been tough.

However, what does taking a break from your mortgage payments mean for your credit score?

Research from mortgage broker Haysto shows that 73% of UK homeowners are worried that it could impact their score. A further 10% believe it will ‘definitely’ have a negative effect.

What do I need to know?

The deadline to apply for a mortgage payment holiday is coming up. If you haven’t had a payment holiday yet, you can still request one up until 31 March 2021.

Even if you have had one, or are currently on one, you can ‘top-up’ and apply for a payment holiday of up to six months in total. This means not having to make your mortgage repayments for six months.

But there are some key things to be aware of:

  • You will still be charged interest during the payment holiday. So it is only a good idea to request a holiday if you really need to.
  • You will need to pay your full mortgage back eventually. So to make up for taking the holiday, you’ll either have to increase your monthly payments or extend your mortgage term.

Will a mortgage payment holiday affect my credit score?

When mortgage payment holidays were announced, it was emphasised that taking one should not affect your credit score.

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And that is still the case. The break in your repayments won’t be reported as missed payments.

Typically, if you miss a mortgage payment, your lender will have to inform the credit reference agencies and it will then show up on your report. But if you have agreed a mortgage payment holiday, then it will be reported as if a payment has been made.

What’s the future impact?

It is worth being aware that future lenders will still be able to find out about a mortgage payment holiday. Either they will see a gap in the payment history, or they will see that your mortgage balance isn’t going down.

This isn’t necessarily a bad thing. It’s not a black mark on your report like a missed payment. But it depends on the lender’s criteria as to whether or not they want to consider this a factor when deciding whether or not to lend to you.

As we cover in our article on understanding your credit report and credit score, there is no single credit scoring system used by all lenders. It is more about a lender’s own appetite for risk and criteria for the type of borrower they want.

Another thing to bear in mind is that because you will still be charged interest during the holiday, your mortgage balance will be higher. This means that your overall financial health may be affected. So if lenders are doing affordability checks, you may appear to be in a worse position than before your holiday.

If you are worried about your credit score, there are some simple ways to improve it. Take a look at our three tips for improving your credit score.

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