Debt Management: Should I use a Mortgage/Credit Card Holiday to ease my finances?

Hello everyone! I hope you are all keeping well in the present environment! There’s a couple of points that Government has enacted in the present crisis via the Financial Conduct Authority to try and assist people who may be struggling with debt or financially as a result of hardship during Coronavirus. You can read the release from the FCA here.

These include a 3 month holiday on mortgage payments, a 3 month holiday on credit card payments and no interest charged on an arranged overdraft up to £500.

What this covers

You’ve been able to apply for a mortgage holiday for a couple of weeks, and legislation on a credit card holiday comes in this week. However, these won’t trigger automatically – you need to approach your lender and ask if you want to take advantage of the payment holidays.

If you’re using an arranged overdraft below the £500 threshold, this will trigger automatically.

These are sensible initiatives brought in by the Goverment – I’ve spoken on this website about the worry and stress that debt can bring, and knowing that you at least have some security in your present time is a comfort.

However, it should only be used if necessary, because interest will still be taken on the balances. (Meaning that whilst you’re shielded from having to make payments immediately, the overall debt does increase).

As a side note: If you’re really worried about your ability to pay back your debts longer term, you should still have it in the context of a conversation with your lender in terms of working out a longer term payment plan. The principles in our post of how to manage your way out of credit card debt really apply to all types of debts (just ignore some the bits that are more card focused).

One other thing on the good side is that this will not impact your credit rating, which is an important distinction.

On the negative side, motor finance debt (where you have a repayment plan for a car) is still excluded and payday loan debt.

However, as we flag in our recent post on sensible financial actions to take during the present times, you should ask you lender if any loan is causing you difficulties, and there’s a guide on how to do that within that post.

(P.S There’s also rumours that the Government will address the motor finance angle this week, as this is a major outgoing expense for many households).

A picture of a speedometer

A Note of Caution

However these payment holidays are also slightly dangerous tools as well because you don’t have that money coming out for your account and so it feels like you don’t have to pay it..

I don’t want to scare, but it’s really important to hammer home the point if you’re taking advantage of this in big letters!

This is NOT free money. It is a payment holiday!

So you need to plan for making those payments at a later date, because it can set you up with bigger problems, if longer term if you don’t. No panicking though – there’s plenty of sensible things we can do to ease this process!

So my answer is yes – take the help but only if you absolutely need to. It’ll provide some useful flexibility but there are disadvantages.

If you’re in that position, I’ve got some advice below on things to consider to avoid some of those longer term pitfalls.

Where to start – work out your immediate obligations

So it’s worth spending a little bit of time working out what the terms of any payment holiday are.

Is the money due back soon on immediately after the holiday (potentially the case if you’ve been able to negotiate a holiday with rent payments, where you are likely to be on a 12 month or less contact) or will they be spread over the rest of terms of the loan? (More likely with a mortgage where you pay over a longer term).

From this we can work out a payment schedule – you should know how much will fall due and when so you can plan for this as a target.

I.E, it’s worth saving up to make sure you can pay any balances that would fall immediately due.

Next…..save like crazy.

Often what stops us saving is the constant stream of bills going out and needing to be paid! This time is absolutely ideal for saving – with little open, cutting back on expenses and minimizing that spending should theoretically be easier. It’s honestly a great once-in-lifetime opportunity to get your financial house in order.

A pot of money being saved.

I really recommend going through your spending (yes it’s dull, but it really does work) and finding out where your money is going, what you are spending on and what’s essential spending.

You can read some advice for doing just that in the early stages of our article on reducing credit card debt here.

When life returns to normality

If you’ve been able to build up some savings, you’ll find yourself in a position of empowerment – you have choices, and that’s a wonderful place to be in.

I recommend taking any money saved in this period and moving it into a separate account from your day to day current account. That way you KNOW you can meet those bills due come what may.

If you get to this position it’s also worth thinking about what the most beneficial position would be.

Do you need the financial flexibility provided by paying something off over a longer period even if it costs more overall? Or can you pay that money now and save the interest you would have lost in the long term?

I’d nearly always recommend the latter, even if it’s not the easy and tempting choice – it’s these decision that make a huge difference to your finances in the longer term.

A good example is (if you can) paying off more than the minimum on your credit card each month – I lay out both the rationale and longer term benefits in this post.

Remember, if you’re paying off debts it makes sense to get rid of the one with the highest interest costs first, as you’ll gain the most long term from doing this.

Thanks for reading! If you’ve got any questions on the above or other issues, I’m happy to try and help if you leave a comment below. There’s a lot of information out there and it’s not always the easiest to unpick….

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