Advice on Mortgage Payment Holidays

With the Government announcing a three week extension to the Covid19 lockdown, more homeowners will be considering taking a mortgage payment holiday. However, we are advising borrowers to think carefully before applying for one.

The situation

In response to the financial insecurity felt by many during the lock-down period, the Government has required that all mortgage lenders offer their customers payment holidays and has pledged that this will not affect an individual’s credit score.

Clearly, this is good news for many people whose incomes have been affected by this pandemic and has relieved much anxiety about how mortgage obligations will be met. However, many mortgage-holders who are not in any particular financial difficulties have seen this as an opportunity to improve their cash liquidity or an opportunity to get ‘free money’ and have applied to their lenders, unaware of the potential consequences.

Concerns over payment holidays

Although credit score providers such as Experian and Equifax have agreed that a borrower’s credit score won’t be negatively affected by taking a mortgage payment holiday, the missing payments will still show on a credit report and there is no way of knowing how banks will view or interpret that information in the medium to long term future.

Every lender uses their own algorithms and underwriters to work out whether or not they want to take the risk of lending to someone. The algorithm and underwriters will look at an applicant’s whole credit report and use certain information to calculate their own credit score, which could be very different to the public credit score available through Experian etc. For instance, although erratic payment of a phone bill may not have a dramatic effect on a credit score, it may affect the lender’s view of the borrower. Similarly, individuals have been known to fall foul of certain lenders’ credit score algorithm simply by having a few recent addresses.

Alternatives

Depending on your individual circumstances, there may be alternative solutions available to you before taking the payment holiday:

Asking your lender to switch you to an interest-only product could substantially reduce your repayments

Some people are looking at taking payment holidays in order to save money for home improvements, when actually a further advance might be more appropriate

Advice

Given the unknowns involved, our general advice is to treat mortgage payment holidays as a last resort and only apply for one if you are genuinely unable to cover your mortgage payments.

Borrowers should consider the alternatives and if you’re still intent on going ahead with a repayment holiday application, rather than applying straight to the bank, please talk to your mortgage broker or IFA, who will be able to give you more objective advice than your bank, which will simply process your application.

If you do successfully apply for a payment holiday (borrowers are not automatically entitled to one and lenders will assess each application individually), you should be aware that your repayments will go up once the holiday is at an end and prepare for this appropriately.