From the furlough scheme to 50% eating out discounts, there has been no shortage of financial support on offer during the coronavirus pandemic.
Back in March, the government announced that, in conjunction with lenders, mortgage borrowers would be able to take a three-month payment holiday. In May, lenders extended this scheme for a further three months to support households struggling to meet their mortgage commitments.
Now, the Financial Conduct Authority has announced that mortgage payment holidays are coming to an end. Borrowers have until 31 October 2020 to apply for a payment holiday under the blanket scheme, and once your current payment holiday ends you won’t be able to automatically renew it.
So, what is changing? What happens to your mortgage once the payment holiday ends? And if you have taken a payment holiday, will it affect your ability to borrow in the future?
Why your mortgage payments will rise if you’ve taken a payment holiday
Since March, 1.9 million households in the UK have taken up a mortgage payment holiday to ease pressure on household finances. This means that payments were deferred in about one in six of the UK’s 11 million residential mortgages.
If you took a three-month payment holiday you would have benefited from not having to make three consecutive mortgage payments. However, it’s important to remember that you’re simply deferring the payments, not taking a ‘holiday’.
Here’s an example. Using an online payment holiday calculator, if you had a £300,000 repayment mortgage with 20 years left to run on an interest rate of 2.5%, your pre-holiday monthly mortgage repayments would have been around £1,590.
By taking a three-month payment holiday, when your payments restart, you’d pay around £1,616 – an increase of around £26 per month.
That’s an additional £6,240 over the lifetime of your mortgage, compared to around £4,770 you have saved by not making three months’ payments.
Of course, if you took a longer payment holiday, your repayments would rise even further. So, when your mortgage restarts, expect an increase in the amount you pay each month.
How taking a mortgage payment holiday could affect you in the future
When the government announced that borrowers were going to be able to take a three-month mortgage payment holiday, they were keen to make it clear that doing so would not affect your credit rating.
The Financial Conduct Authority (FCA) said that to minimise the impact of the coronavirus crisis, it has “made sure that there is no negative impact on the credit files of consumers who have been granted a payment deferral”.
Experian, Equifax, and TransUnion agreed to an ‘emergency payment freeze’, ensuring that an individual’s credit score was not affected throughout the agreed payment holiday.
However, some lenders are now saying that taking a payment holiday could impact on your ability to get a mortgage or remortgage in the future. Considering that banking trade body UK Finance says that around 70% of people who took a payment holiday did not need to take one for financial reasons, this could negatively affect hundreds of thousands of borrowers.
If you want to switch your mortgage, or you plan on taking advantage of the Stamp Duty holiday and buy a new home, it could pay to take professional advice if you deferred your mortgage repayments this summer.
This is because while taking a mortgage payment holiday might not directly affect your credit rating, underwriters at some banks and building societies take other information into account when deciding how much to lend.
This can include bank account information, changes to income and expenditure, and also any increased indebtedness as a result of interest accruing during the payment holiday.
A lender will clearly be able to see whether you have taken a payment holiday and for how long. This may then influence their decision as they may determine that you had made no provision for a change in circumstances, such as redundancy or a drop in income.
It may also lead them to look more closely at the industry in which you work and decide that it may be too great a risk if you work in, for example, the aviation or hospitality sectors.
Speak to an expert for advice
In recent months, many of our clients decided to take a mortgage payment holiday. Lockdown directly affected some (in terms of a reduction or loss of income) while others were left in uncertain positions and so make the sensible decision to defer some mortgage payments until they had more clarity about their ongoing financial situation.
With the 31st October deadline approaching, if you haven’t yet applied for a mortgage payment holiday then you should probably only consider doing so if absolutely essential.
If you have taken a payment holiday and you’re looking to benefit from the Stamp Duty holiday, or you want to switch your mortgage to take advantage of the exceptional interest rate available, we can help.
We have contacts at many of the major lenders and have already enjoyed success in agreeing finance for clients who deferred their payments earlier this year.
If you’d like advice, please get in touch. Email [email protected] or call us on +44 (0) 20 3786 7270.
