Coronavirus related mortgage holidays are coming to an end. Should you extend your mortgage holiday further? How will it impact your credit rating and future borrowing power? And what are the other options?
The coronavirus pandemic has left many of us faced with a significant loss of income. On Tuesday 17 March 2020, the government responded by announcing that all homeowners can claim a “holiday” from their monthly mortgage repayments. This scheme ends at the end of October 2020. What are your options now and is a mortgage holiday still a good idea?
How does a mortgage holiday work?
A mortgage holiday is when your mortgage payments are paused for a period a time.
A mortgage holiday doesn’t mean your lender will cover the cost of your mortgage or simply wipe away months worth of mortgage payments. Instead, they will be allowing you to defer the payments to a later date in the future. This means you will see an increase in future payments.
The aim of the government’s coronavirus-related mortgage holiday scheme was to help people who were struggling to meet their mortgage payments as a result of the pandemic. Now this scheme has ended, mortgage holidays may still be on offer – but with some changes.
From November 2020, banks and building societies are under no obligation to offer a mortgage holiday. And taking a mortgage holiday in future will impact your credit rating.
A moratorium on repossessions for mortgage arrears imposed during lockdown has also now been lifted, putting some homeowners at risk of repossession.
What happens when my mortgage holiday ends?
Lenders are expected to contact their customers whose coronavirus-related mortgage holiday is coming to an end. But get in touch with them asap if you are likely to struggle to go back to paying your regular monthly instalments.
Depending on your financial situation and your lender, you could:
Resume full monthly re-payments
Discuss with your lender paying a proportion of your monthly payment. This may be acceptable if you are likely to struggle for a short period of time.
Temporarily switch to an interest only mortgage
Further extend your mortgage payment holiday
Will a mortgage holiday impact my credit rating?
A mortgage holiday agreed with your lender between March and end-October 2020 was as a result of a government initiative. These coronavirus-related payment holidays did not impact your credit rating. The credit reference agencies Experian, Equifax and TransUnion confirmed that a homeowner’s credit score would be maintained at the current level for the duration of the payment holiday – although some lenders may may infer you were struggling financially from the gaps in your payment history. But officially, your credit score was protected.
This all changes from November 2020. The Financial Conduct Authority says that from now on, taking a payment holiday will affect a borrower’s credit report. This means that taking a mortgage holiday could affect your ability to secure any further finance in the future.
The FCA said it will be ‘monitoring firms to ensure borrowers are treated fairly’ from November.
Christopher Woolard, interim chief executive at the FCA, said: ‘Some consumers will continue to be impacted by coronavirus in the coming months, or be impacted for the first time.
‘Consumers in these situations will benefit from firms providing them with tailored support.
‘However, it is very important that consumers who can afford to resume mortgage payments should do so for their own long-term interests and so that help can be targeted at those most in need.’
Reports of mortgage prisoners being mis-led over mortgage holidays
As alluded to above, while your credit score has been protected during the course of the coronavirus related mortgage holidays, the FCA has also been quoted admitting that “credit files aren’t the only source of information which lenders can use to assess creditworthiness.”
This has understandably angered homeowners, especially those stuck on higher than average loan rates, who may now find themselves even further away from being able to remortgage to a better deal.
Have mortgage holidays been popular?
Yes. 1.9 million homeowners have taken a three-month mortgage holiday since the scheme was announced in March to help borrowers in financial difficulty because of the coronavirus crisis, according to Treasury figures. That’s almost one in six of all mortgages in the UK.
Will I pay more in interest if I take a mortgage holiday?
Yes. You’ll still owe the bank the same capital amount as you do now, and interest will continue to accrue on this. This means it will take you longer and cost you a little more to clear your mortgage. Therefore it’s best to continue with your monthly repayments if you can.
Can I make partial payments while on a mortgage holiday?
Yes. Speak to your mortgage lender who should be able to accommodate partial payments towards your mortgage.
Can I get a mortgage holiday for my buy-to-let mortgage?
The government announced that Buy-to-Let mortgage holders were also able to apply for a coronavirus-related mortgage holiday. As the scheme comes to an end, speak to your lender of you are struggling to meet repayments.
What are the alternatives to a mortgage holiday?
Remortgaging. Don’t forget that many people can save a lot of money off their monthly repayments by simply remortgaging. The UK base rate very recently reduced from 0.75% to 0.25% – the lowest rate for hundreds of years. That means if you’re on a tracker or variable rate mortgage you could see a reduction in your monthly payment as the rate cut feeds through. Fixed rates are already available at extremely low rates and could offer the chance to lock in whilst interest rates are so low.
Switching to an interest-only mortgage. Many banks have said they would let customers switch to an interest-only mortgage to make monthly repayments more affordable. This could be a temporary switch.
Extending your mortgage term which in turn will reduce your monthly payments.
Making partial payments. Everyone’s circumstances will be different, so when homeowners can pay some or all of their mortgage, the government has advised they should work with their lender on a plan