You might be considering taking a mortgage holiday to get you by on a few difficult months. But, will this affect your credit rating?
The predicament is, if during the life of your mortgage you do something that causes your credit score to fall and then you decide you want to remortgage to a cheaper offer, you may find that because of the lower rating you are not accepted for better offers, or the offers can come at the cost of higher repayment rates. So affecting your credit rating is something that you most beyond doubt want to keep away from. It could even prevent you from taking out other borrowings, such as credit cards, car borrowings and so on.
What is a credit score for?
Let’s look then at what the rating is actually intended to be used for. The idea is that it gives your possible lender an idea of how you have previously managed your finances and whether you are paying them off to the agreed timescales, or better.
Your next lender wants to know that you have a history of correctly paying off loans and are not prospective to become a hassle to them. They want customers that will pay off the correct month every month without fail. And if there is a chance that you will need regular chasing and threatening letters, then they will want to increase your loan repayments to cover the extra work.
Where does a mortgage holiday fit this description?
The important thing to look at is that the credit score is trying to identify those people who are not correctly handling their repayments. It is trying to identify people who are borrowing beyond their means and are not there repayments.
Now, a mortgage holiday might, at first glance, seem to fit this description. For whatever reason you have decided that you cannot afford the normal repayments and are asking your bank manager to extend you a couple of months without repayments, either in exchange for lengthening the loan or for increasing the repayments.
Is a mortgage holiday good management?
But, your credit rating is trying to identify whether you are managing your finances, not whether you are happy around the next month or two and taking actions.
As for instance, you might merely have had a new baby and one of you is not working for a month or two and you need help. By approaching the bank manager and explaining your situation, rather than waiting until the angry letters arrive on the door, you are proactively managing your finances correctly. This, therefore, is what should be reflected.
So, does a mortgage holiday affect the score?
Of course, speak to your bank before you go ahead with anything in case they have a strange policy of there is a problem with the system, but a pre arranged mortgage holiday should be seen as correctly managing your finances and should not be recorded as there being a problem. On the whole, a mortgage holiday should not affect your credit score. But make sure it is arranged with your bank, rather than just missing payments!
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