Payment Holidays Explained

Understanding Mortgage Terms: Payment Holidays

Depending on your mortgage lender, and the individual mortgage you have, it may be possible to take what is referred to as a payment holiday.

A payment holiday is basically a break in the payment plan on your mortgage so that you can miss a month or a number of months payments.

There are basically two types of payment holidays, the first and most common is a feature of a flexible payment mortgage. With this type of mortgages the borrower can pay any amount over the agreed mortgage payment. If this has been done the borrower is able to miss payments until the amount paid over the minimum has been used up. In most cases this would need to be agreed in advance with the lender, otherwise this could be regarded as missing a payment and subject to any penalties that this would normally attract.

The second type of payment holiday is where a lender may have only made the minimum payments required but can apply to take a payment holiday for a certain number of months for certain purposes without having to have built up a reserve of overpayment first. This type of payment holiday is usually offered as an alternative to a personal loan and as such is designed for paying for specific items rather than as a break in case of financial difficulties.

Although the idea of a payment holiday may look attractive it is worth working out how much this will cost you and whether this is really a cost effective way of borrowing money. With the second type of payment holiday you may not start to pay the extra payments until the end of the mortgage and this means you will be paying interest on the value of payments missed for the remaining life of the mortgage.

With a flexible mortgage any overpayments you have built up will be reducing both the term of the mortgage and the total amount of interest paid over the course of the mortgage. If you have worked hard to get ahead with mortgage payments it is probably not worth giving this up if you can avoid it.

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Posted in Loans, Personal Finance

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