Post-18 education funding: the changes and their effects in the future

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As the cost of living crisis deepens, you may be assessing your regular monthly outgoings and looking for things you can cut back on. If you are lucky enough to be a homeowner, your biggest monthly expense is likely to be your mortgage.

But will your lender allow you to reduce your payments if you explain that you are struggling? And how will that affect your credit record? Similarly, if you have life insurance or a pension, can you take a break from your payments, and what will the consequences be?

Taking a break from your mortgage

According to UK Finance, the trade association for banks, mortgage lenders should offer “forbearance” to any customer who is in financial difficulty or unable to make their mortgage payments.

This could take the form of an authorised payment holiday, where your lender gives you permission not to pay your mortgage for a short period, usually up to three months. Alternatively, with your lender’s permission, you may be allowed to reduce your monthly repayments.

It can be tempting to cut pension contributions when money gets tight but you are losing more than just your own contribution

These arrangements come at a cost. Any payment holiday will be noted on your credit record, which could have implications the next time you want to borrow money – you may, for example, be charged a higher interest rate. You will also be expected to pay back everything you have missed paying once you are no longer in financial difficulty. Your mortgage is likely to cost you significantly more in the long run.

Cancelling life insurance premiums

LV= allows this – but you can only benefit if your policy (for income protection, critical illness or life insurance) has been in force for a year or more, you have a good history of paying and are less than three months behind with monthly premiums. You must declare that you have suffered a significant drop in your income or that your usual earnings have stopped. The payment break will only be offered for a month at a time, for up to three months.

If you do find yourself in a position where you have to cut or stop your contributions, try to resume them as soon as you can.

For example, it says a 33-year-old with £250,000 of life cover, paying £21.86 a month, could reduce their payments to £4.17 a month for six months. However, the maximum that could be claimed during this six-month period would be only £10,000.

Cutting your pension contributions

You may also be considering reducing or stopping your pension contributions for a while. This may ease your financial pressures a little in the short-term but it will reduce your income in retirement.

Cutting £693 a year from your pension will mean £1,284 less goes into your fund. If that money manages to grow by 5% a year until you retire, the long-term cost is even greater. Hargreaves Lansdown, an investment platform, estimates that a 40-year-old basic-rate taxpayer who cuts back on their pension payments in this way – reducing their contributions by only £57.75 a month for only one year – would end up £4,569 worse off, before fees, by the age of 67.