Mortgage payment holidays came to the nation’s attention during the Coronavirus pandemic. It was estimated that around 15 million homeowners in the UK took advantage of taking a break in their mortgage payments. And it wasn’t just mortgages; millions more took payment holidays on credit cards, loans and other types of finance.
Since then we’ve had an influx of enquiries from people wanting to know if they can still get mortgages after having used a payment holiday. In this guide we wanted to share with you what the possibilities are, and what your mortgage application chances are.
The background behind mortgage payment holidays?
The mortgage payment holiday was introduced by the government (see source) to help provide flexibility in repaying a mortgage by allowing you to stop or reduce your monthly payments for a period of up to three months.
The purpose was to provide much needed financial assistance if it was needed. It was not an interest free holiday, so it was not free money and it was not necessarily suitable for all borrowers.
In basic terms the holiday had the effect of adding a small amount of extra interest to a mortgage and extending the term by 3 extra months.
Mortgage lenders and credit reference agencies were instructed by the government that payment holidays must not be recorded as arrears and therefore should not affect a person’s credit rating, but is it as simple as that?
Will I be refused a mortgage if I have had a payment holiday?
Whilst official guidance states that taking a mortgage payment holiday should not adversely affect a person’s credit record, that is not the same as a guarantee that future applications will still be treated the same as if you had not taken a payment holiday.
Christopher Woolard, interim Chief Executive at the FCA, said:
“The changes will provide support for consumers with credit cards, loans and overdrafts, facing temporary financial difficulties because of the pandemic. Customers should think carefully before making use of these measures and only do so if they need immediate help. Where they can still afford to make payments, they should continue to do so.” (Read full statement)
It is likely that lending applications will include a question which asks if the applicants have ever taken a payment holiday, and how different lenders react to a yes will likely vary.
A specialist mortgage adviser will be well placed to guide you through the various different lending criteria to help you find the right lender for your needs.
Can you get a mortgage if you took a payment holiday without getting agreement?
What about if you took a payment holiday without first getting advance agreement from the finance lender? Is this going to stop you from getting a mortgage?
Yes, it may well. The guidance to credit reference agencies was that payment holidays must not be treated as missed payments provided; they were pre-agreed with the lender. To ensure a credit report remained unaffected a customer must have continued to make regular payments until agreeing a payment holiday with their lender.
Part of that agreement would be to agree the length of time the payment holiday would last up to a maximum of three months. Once agreed the credit reference agencies: Experian, Equifax and TransUnion applied the ’emergency payment freeze’ to the relevant credit record.
Without an agreement on a payment holiday, your missed payments will have been treated as arrears and will have a negative impact on your credit score. This will mean that many lenders will refuse to offer a mortgage, a mortgage adviser will be able to guide you.
I agreed a mortgage payment holiday but got behind with other debts
An up to date mortgage record is possibly the most important thing when applying for another mortgage or other credit. However, your repayment record on all bills and credit will affect your ability to get approved and will also have an impact on the interest rate that is offered.
If you have kept up your mortgage repayments but missed payments on credit cards, car loans, utility bills or any other type of debt then this is likely to have a negative impact on your credit record will therefore restrict your choice.
The extent of arrears also matters in that missing just one payment will not be viewed as negatively as an account which has been allowed to go 3 months into arrears and had a default notice registered.
A specialist mortgage adviser will research lending options across a large number of banks, building societies and specialist lending firms and help find what options are available.
My payments increased after a payment holiday so can I consolidate them?
Yes, this is because the lender would have continued to charge interest, and this would have increased as no payments were being made. In affect you would have been charged interest on unpaid interest, which is known as compound interest.
The below example shows how quickly a typical credit card balance can increase when compound interest is added. The example uses an assumed interest rate of 29.9%:
- Your credit card balance: £10,000
- Your minimum monthly payment: £320
After a 3-month payment holiday this increases to:
- Your credit card balance: £10,680
- Your minimum monthly payment: £340
If you have a large number of credit commitments that have had a payment holiday, then you may find that the balance you owe and the monthly payments due increased substantially.
A specialist mortgage adviser can help you in finding what options you have to consolidate your credit and outgoings back to more mortgageable levels.
In conclusion, whilst payment holidays were a necessary step and extremely useful and welcomed at a time when peoples finances were under great strain, there may be longer term consequences that need addressing long after the 3-month period has ended.
By seeking the assistance of an expert, you should be able to get your finances back on track and to where they were prior to the Covid-19 pandemic.
If you would like our help then Specialist Mortgage Online are ready to put you in touch with the right adviser straight away.