Payment holidays have been widely used as a way of relieving the strain put on UK households as a result of the widespread financial impact of coronavirus, with 1 in 6* mortgages now utilising payment holidays.
In times of great uncertainty, payment holidays provided a much-needed ‘break’ from repayments for some households, but with many of the initial 3 month repayment holidays drawing to a close, the FCA have announced that mortgage holders can apply to have their holidays extended for another 3 months. Read more here.
With these announcements, it’s important to consider the potential long-term impacts of payment holidays.
At present (5/06/2020) the extension only covers mortgage products, and the FCA’s statement confirms that:
- Mortgage holders who have not yet applied for a payment holiday and experience financial strain, may still do so up until 31st October 2020
- The ban on lenders repossessing homes during the crisis has been extended to 31st October
- Lenders must contact customers who have had payment holidays and discuss what to do going forward. If repayments can continue, then that option is advised but payment holiday extensions should be available to those who need them. The option of full or part payment holidays should also be available.
What is a payment holiday?
A payment holiday is a pre-agreed break, or ‘holiday’ from making repayments on a loan you owe, such as a mortgage. The holiday must be approved by your lender for it to be official, not making payments with lender agreement would be considered a ‘missed payment’ and could harm your credit report.
Since the payment holidays were introduced in March by Chancellor Rishi Sunak as a method of offering support to homeowners struggling financially during lockdown, UK Finance figures show 1.86 million* customers have taken a payment holiday since the start of the crisis.
How will a payment holiday impact my credit?
Following the initial announcement of payment holidays being utilised Equifax, Experian and TransUnion offered more support to those being impacted, by preventing authorised payment holidays from having a negative impact on credit scores. This protected the credit scores of homeowners in financial difficulty that needed to take a break from repayments.
However, it’s important to remember that your credit report isn’t the only source of information lenders use to determine approval for credit applications. Whereas your credit report won’t indicate a payment holiday has been taken, Open Banking and other affordability assessments that allow lenders to view bank statements would likely show a repayment holiday and could impact creditworthiness when lenders determine risk.
An FCA spokesperson said: “Credit files are an important tool, along with other checks, for making sure that credit is affordable. To minimise the impact of the coronavirus crisis, we have made sure that there is no negative impact on the credit file of consumers who have been granted a payment deferral. Credit files will show that consumers have been up to date with mortgage payments for the duration of the payment holiday”.
When a payment holiday is approved and repayments temporarily cease, you’ll still be charged interest on the sum you owe. You won’t need to pay it back all at once and the method of repayment varies between lenders, but lenders will usually seek repayment by:
- Increasing monthly repayments after your payment holiday has ended to spread cost
- Extending the term of your mortgage — keeping your monthly repayments the same but adding more time to your payment term
Christopher Woolard, Interim Chief Executive at the FCA, said: ‘It is important that if a consumer can afford to re-start mortgage payments, it is in their best interests to do so. Customers should talk to their firm about the best option available for them.’
Making sure you can afford potentially increased mortgage repayments after taking a payment holiday is an important factor to consider when deciding whether to take one.
How we can help:
There are a variety of alternatives to payment holidays, and our mortgage advisors specialise in finding the most suitable solution for your personal circumstances.
If you’re on your lenders standard variable rate (SVR) or are approaching the end of your fixed term you might be eligible for a product transfer. Your current lender, bank or building society can only talk to you about the products they offer, they are not able to offer you products from other lenders and you are potentially missing out on better options.
Even if you’re concerned with how a payment holiday could have impacted your creditworthiness, our advisors specialise in helping with all kinds of credit situations, from debt consolidation to getting a mortgage after bankruptcy.
*Source: UK Finance as of 28 May 2020 (https://www.ukfinance.org.uk/press/press-releases/lenders-commit-to-ongoing-support-for-mortgage-borrowers)