Coronavirus mortgage holidays explained
If you’re a mortgage borrower and worried about your finances during the Coronavirus crisis, you may have heard the Government’s announcement on payment holidays this week.
Chancellor Rishi Sunak said lenders would offer a three-month payment holiday to those who cannot meet their mortgage repayments due to the financial impact of the Coronavirus.
What’s a payment holiday?
It’s literally a break from your monthly mortgage payment – but importantly it doesn’t mean the lender pays it for you.
Your monthly repayment is simply deferred for up to three months, in this case to give you financial breathing space, but the interest on your borrowing still accrues.
This temporary break could be invaluable if you are off work sick due to Coronavirus, self-isolating and unable to work, or if you work in an industry particularly affected by the crisis.
The trade association for the banking sector, UK Finance, and the Building Societies Association have published some frequently asked questions (see below) about the support measures and how you can access them.
Remember, the situation is changing quickly and lenders are working hard to put new processes in place.
Payment holidays are not necessarily guaranteed across the board, but they are one of a number of measures potentially available to borrowers. Lenders already use a range of different forbearance measures to support borrowers in financial difficulty.
The best thing to do is contact your own lender who will do their best to help.
Your questions answered
Q: Will all customers receive an automatic three-month payment holiday?
A: A flexible approach will enable all types of lenders to offer the right support for customers. Many lenders will want to speak to customers to find out how they can tailor the best option for them.
Firms will help customers the best way for the individual, but an automatic payment holiday may not always be the most suitable approach and may not be required by all customers.
Firms will be speaking to credit reference agencies to ensure consistent treatment of those customers to whom a repayment holiday is made available.
Q: How do I apply for a payment holiday?
A: Lenders recognise that these are unprecedented and difficult times for customers. This is why they are offering customers who are up to date with their mortgage payments and impacted by COVID-19 the ability to self-certify if they need help.
Under usual circumstances, the lender would have to assess the customer’s finances and consider what forbearance options may be the most suitable. This is being waived to allow firms to implement a more straightforward process in an otherwise stressful time. Should the customer wish, the lender could conduct a full assessment of their finances.
It’s therefore important that customers who believe they may be impacted by COVID 19, either directly or indirectly, contact their lender at the earliest possible opportunity to discuss if the payment holiday is a suitable option for them.
Q: Are all customers eligible for a payment holiday?
A: This is one of a number of options that lenders can offer. The offer of a payment holiday can be made available to customers not already in arrears and up to date with payments.
Under FCA rules, lenders must ensure that any forbearance offered enables recovery through full repayment of arrears, minimises the long-term impact of arrears, and that the mortgage remains affordable and sustainable. Overall, forbearance needs to minimise the risk of possession.
This is why payment holidays are generally short-term. For customers who are already in arrears or in financial difficulty, lenders will consider the full suite of forbearance options that are ordinarily available to customers under existing rules.
Providers will look at customers’ individual circumstances and offer support on a case-by-case basis.
All providers are ready and able to offer support, we would encourage customers to speak with their provider at the earliest possible opportunity to discuss the options available to them.
Q: But lenders are only offering a short-term measure – what about customers who may be likely to need support longer term or help to recover to their previous position after the payment holiday expires?
A: While the payment holiday is in effect, the capital sum of the loan remains as is, while the interest that would have been paid in the period accrues.
At the end of the payment holiday period, the rules will re-apply. Lenders will get in touch with customers to assess their circumstances, including income and expenditure, and come to an arrangement with the customer to enable recovery through the full repayment of the arrears.
If the customer is in financial difficulty, lenders will come to an arrangement to recover the customer into a sustainable position on the mortgage. Any forbearance arrangements will aim to minimise the risk of possession.
Q: How do ‘payment holidays’ work?
A: The mortgage repayment is deferred for a period. The monthly payment changes to zero, and interest accrues for the period. This may be particularly appropriate where there is a temporary shortfall of income.
However, this is not a solution where, because of a permanent reduction in income, a borrower is unable to afford anywhere near the full mortgage repayments and there is little prospect of an improvement in the situation in the foreseeable future.
Where repayments are deferred for a time, the borrower will need to make up these repayments in the future, which could be over the remaining term.
Q: How will this affect my credit score?
A: Lenders have different approaches for reporting to credit reference agencies. Arrears that are accrued may be reported to the CRA. Firms will make efforts to ensure that forbearance offered under these circumstances will not result in an adverse impact on the customer’s credit score.
Q: What if I don’t own my property but rent instead?
A: You should contact your landlord or managing agent if you have problems paying your rent. If you are a landlord and your tenants are unable to pay their rent you should contact your lender as soon as possible to discuss the options that may be open to you.
Q: What if I’m already in arrears?
A: You should continue to speak to your lender. Lenders will review existing arrangements if there is a change in circumstances.