Homeowners whose finances have been affected by COVID-19 can apply for mortgage payment holidays of up to six months, despite plans to end this type of financial support on 31 October.
Here, Which? explains how the rules will work and offer advice on the pros and cons of taking out a mortgage payment holiday.
- Mortgage payment holidays: what’s happened so far?
- FCA proposes payment holiday extensions
- What is a mortgage payment holiday?
- Do I qualify for a payment holiday?
- Do I need to have had coronavirus to apply?
- Will I need to go through affordability tests?
- What happens after the payment holiday?
- Alternatives to mortgage payment holidays
- Will deferring my payments affect my credit score?
- What if my credit report is wrongly affected?
- Will a payment holiday affect future credit applications?
- How do I get a payment holiday?
- Will I be able to remortgage during a payment holiday?
- Case study: setting up a mortgage payment holiday
Mortgage payment holidays: what’s happened so far?
In March, the government announced UK homeowners suffering financial loss due to COVID-19 could take a three-month payment holiday on their mortgage.
Applications for formal payment holidays were set to close on 31 October, with banks agreeing to offer tailored support to borrowers who needed it thereafter.
This could include options such as extending mortgage terms, temporarily reducing monthly repayments or switching mortgage types, but unlike initial payment holidays, the support would be reflected on the borrower’s credit report.
With the announcement of a further national lockdown, however, these plans were been put on hold.
FCA proposals on mortgage payment holidays
On 17 November, the Financial Conduct Authority (FCA) published new guidance for mortgage borrowers experiencing payment difficulties due to COVID-19.
The rules mean homeowners are entitled to payment holidays of up to six months in total.
- If you’ve not taken out a payment holiday since the start of the pandemic, you can apply for deferrals of up to six months.
- If you currently have a deferral in place, you can extend this to take you up to the six month limit.
- If you’ve resumed repayments after a deferral, you can apply for another one to take you up to the six month limit.
- If you’ve already had six months’ worth of deferrals, you won’t be eligible for a further payment holiday. Your lender will instead offer you support tailored to your circumstances.
Borrowers have until 31 March 2021 to request a payment holiday. After this date, you’ll be able to extend deferrals up to 31 July, subject to not exceeding the six month limit. Deferrals will not be reported as missed payments on credit files.
The FCA has also confirmed that the ban on repossessions will be extended to 31 January.
What is a mortgage payment holiday?
A mortgage payment holiday is when your monthly repayments are paused for a set period of time.
During this time, interest will continue to accrue, so it will ultimately cost you more in the long run.
With this in mind, the FCA had advised that borrowers who can afford their mortgage payments continue to make them as normal.
The FCA has confirmed that lenders shouldn’t charge any additional fees to set up a payment holiday.
- Find out more: how mortgage payments work
Do I qualify for a payment holiday?
Payment holidays are available to UK homeowners who are up to date on their mortgage payments.
They’re also available to buy-to-let landlords whose tenants have been financially affected by coronavirus. Landlords who take payment holidays are expected to pass on this relief to their tenants.
Homeowners who are in arrears on their mortgage should contact their lender, which will review any changes to their circumstances and discuss their options.
If you’re eligible for a payment holiday (see the rules above), you’ll need to apply by 31 March.
Do I need to have had coronavirus to apply?
You don’t need to have contracted or tested positive for coronavirus to apply for a payment holiday.
Payment holidays are available to any homeowners who are concerned about their ability to meet their mortgage repayments, for example, due to a loss of work or other changes in their circumstances.
- Find out more: Which? news and advice on coronavirus
Will I need to go through affordability tests?
No. Your lender will not require you to provide any documentation or undergo any affordability tests.
Instead, homeowners will need to self-certify that their income has been directly or indirectly affected by the coronavirus.
If you’re a landlord, you’ll need to self-certify that your tenant’s income has been affected by the outbreak.
What happens after the payment holiday?
Your lender will contact you at the end of the payment holiday to assess your circumstances and agree on a manageable way for you to make up the deferred payments.
Lenders should provide a range of options, which may include extending your mortgage term or altering your monthly payments if it’s affordable to do so.
The FCA’s guidance says that firms shouldn’t take a ‘one size fits all’ approach, but instead come up with tailored plans to help borrowers get back on track with their payments.
Alternatives to mortgage payment holidays
Payment holidays are just one option that lenders can offer, so it’s best to call your bank or building society and discuss what measures are available.
You don’t need to undergo an affordability assessment, but if you’re willing to do so then your bank could offer you more tailored support.
For example, some of the following options may be available:
- To move your mortgage to interest-only payments for a period
- To defer your interest payments for a period
- To extend your mortgage term (reducing your monthly payments)
- To add the deferred payments to the overall amount you owe and spread this over the remaining mortgage term
Will deferring my payments affect my credit score?
A formal payment holiday won’t be shown as a missed payment on your credit file, so it shouldn’t affect your credit score.
The FCA has confirmed, however, that customers who seek further support from lenders after their payment holidays end should have this reflected on their credit files. It says doing so will help ensure lenders have an accurate picture of customers’ financial circumstances.
- Find out more: what a payment holiday will look like on your credit report
What if my credit report is wrongly affected?
If your lender wrongly submits your payment holiday as a default on your credit report, it’s important that you flag this as soon as possible. If you inform your lender of the error and it accepts responsibility, it will be able to fix the mistake itself.
You can also raise a dispute with the credit referencing agency. All of the major agencies offer online services where you can raise and submit disputes. Once you’ve submitted the issue, the agency will ask the lender to check its records and amend any errors.
Will a payment holiday affect future credit applications?
The affordability checks carried out when you apply for a mortgage vary from lender to lender, and banks assessing your account information and expenditure may see that you took out a payment holiday and factor this into their lending decisions.
It remains to be seen how much of a problem this will be for applicants in the future, but it does mean that you should carefully consider whether you really need to take a payment holiday before applying.
How do I get a payment holiday?
To get a payment holiday, you’ll need to contact your bank directly.
Most banks provide online services where you can quickly apply for a payment holiday, but consider phoning your lender to talk through your options if you’re not sure it’s the right decision for you.
Don’t cancel your direct debit
It’s vitally important that you contact your lender to request a payment holiday, and don’t simply cancel your monthly direct debit.
If you cancel the direct debit, this will be considered a missed payment rather than a payment holiday.
The missed payment would then be registered on your credit file, potentially affecting your chances of remortgaging or borrowing further in the future.
- Find out more: best and worst mortgage lenders
Will I be able to remortgage during a payment holiday?
Guidance from UK Finance states that homeowners remortgaging with the same lender (known as a product transfer) will be able to do so even if they have a payment holiday in place.
Existing customers who have been furloughed will also be eligible for product transfers.
Case study: setting up a mortgage payment holiday
Freelance writer Andrew Dickens (pictured) set up a mortgage payment holiday with Coventry Building Society.
He told Which?: ‘I requested the payment holiday for the sake of my mental health. In the space of five days, I’ve had thousands of pounds’ worth of work cancelled as a direct result of the virus, which is quite a blow.
‘I have savings but I don’t want to eat into them any faster than I need to, so I applied for the payment holiday as a pre-emptive strike. The holiday allows me to spread out the cost and feel easier over the next few months.’
Andrew told us that his future mortgage repayments will become around £10 a month more expensive, but he feels the move is worthwhile.
He says: ‘It’s something of a gamble because the mortgage as a whole will become a tad more expensive and I might not need the holiday in the end, but it’s one worth taking for my sanity.’
No effect on credit scores
In line with the guidance from UK Finance at the time, Coventry didn’t undertake a full assessment of Andrew’s financial situation. Instead, he was simply asked why he wanted to take the payment holiday.
He told us: ‘My first question was whether my near-perfect credit score would be affected. The representative told me there would be no mark on my report and no adverse affects. It sounded like he was reading out a prepared line’.
A five-star service
Unlike some homeowners, Andrew found that getting in touch with his lender was a quick and pain-free process.
He got through to Coventry within seconds after some security checks and was passed on to a team set up to deal specifically with these requests.
‘Assuming everything I was told works out then this was a five-star service’, he says.
Coronavirus advice from Which?
Experts from across Which? have been compiling the advice you need to stay safe, and to make sure you’re not left out of pocket.
- Coronavirus: what it means for house prices
- Coronavirus: what it means for rent, mortgages, savings, loans, banking and benefits
- Coronavirus: your rights if an event is delayed or cancelled
- Coronavirus: how to protect your pensions and investments
- Coronavirus: what it means for your travel insurance
- Coronavirus scams: how to spot them and stop them
- Coronavirus: your travel and consumer rights Q&A
You can keep up to date on our latest coverage over on our coronavirus advice hub.
This story was originally published in March and has been updated since. The last update was on 17 November 2020 with details of the FCA’s guidance on extending payment holidays until 31 March 2021.
source https://www.which.co.uk/news/2020/11/coronavirus-how-to-apply-for-a-three-month-mortgage-payment-holiday/