Mortgage payment holidays could trap prisoners on high cost loans
Mortgage prisoner campaigners say they feel misled by the government and mortgage industry after finding out a payment holiday may affect their chances of escaping their high cost loans.
Lead campaigner Rachel Neale says mortgage prisoners, who pay higher-than-average interest rates, took a payment holiday believing it would not scupper their chances of switching to a high street lender under the Financial Conduct Authority’s (FCA) reduced affordability rules.
But during a meeting with UK Finance officials to talk about lenders’ adoption of the revised rules, Neale asked if a recent statement made by economic secretary John Glen that payment holidays may affect lenders’ decision to lend was correct. UK Finance confirmed it was true.
Glen’s comments were reported by the Mail on Sunday, and Your Mortgage’s sister title Mortgage Solutions has since seen sight of the letter.
Glen wrote that while credit files should be protected in accordance with FCA guidance when taking out a payment holiday, it may be that a lender’s willingness to lend is affected, particularly in the short term.
When the government issued its announcement on 22 May that the three-month payment holiday scheme would be extended it added a note which read: “Payment holidays and partial payment holidays offered under this guidance should not have a negative impact on credit files.”
However, on the same day the regulator issued its statement that said “credit files aren’t the only source of information which lenders can use to assess creditworthiness”, sparking concern from brokers over how lenders would treat borrowers who had paused payments.
Neale said: “We met with UK Finance and asked them if it was correct that people can be refused a mortgage if they have taken a mortgage payment holiday. They said yes, they can be refused help because the FCA has given banks and building societies that permission.”
Neale says lenders are not acting in the spirit of the initiative which was to help borrowers, including mortgage prisoners, during the pandemic.
She added: “We were told that if mortgage prisoners had taken a three-month payment holiday, banks and building societies may assess them under the reduced affordability assessment, but any longer than that and it would be unlikely they would be accepted.
“It is utterly unfair how the UK public is being misled. We were told a payment holiday would not impact borrowers moving or borrowing during these times.
“We have again been let down by the government in this along with a mortgage industry that will not look to help those paying the highest price.”
‘Lenders can delve deeper’
Around 1.9 million mortgage accounts are currently in the payment deferment scheme, according to Experian. Its analysis found that a quarter of those who had paused their payments had not seen any reduction in their disposable income and were using the scheme to shore up cash for the future.
Mortgage brokers have been warning borrowers of the risks of taking a payment holiday they may not have needed.
Association of Mortgage Intermediaries chief executive Robert Sinclair said: “There is a definite gap between what was intended when Rishi Sunak announced this as a benefit to consumers and the FCA’s statement.
“When Sunak’s office said taking a payment holiday will not impact on your credit file, he meant it won’t impact you at all.
“But the statement that later followed from the regulator gave lenders the right to reflect on whether there have been deferred payments using other means, like missing unsecured credit payments or reviewing their credit history.
“Lenders have been told they can delve deeper.”
Kate Davies, executive director of the Intermediary Mortgage Lenders Association (IMLA) said it was “understandable” that lenders would want to take a closer look at the financial position of a borrower who has yet to return to their monthly payments or who has applied for an extension to their first payment holiday.
Lenders would want to establish why the holiday was requested and whether borrowers’ income had been affected.
“While the FCA does allow lenders to carry out modified affordability assessments, the rules state that this can only take place when a borrower is up to date with their mortgage repayments,” added Davies.
“By definition this does not include borrowers who have taken a payment deferral and thereby have not repaid outstanding sums due on their mortgage.
“However, each lender will have a different approach to how they underwrite these cases, and they will take into account the impact of repaying the deferred amount to make a prudent and responsible lending decision.”
What lenders are doing
Only three lenders have openly confirmed they are using the flexible affordability assessment to offer mortgage prisoners a remortgage.
West Bromwich Building Society said it does not hold mortgage payment holidays against borrowers but they must confirm there have been no changes to their income or expenditure because of the pandemic.
NatWest states on its Mortgage Prisoner hub that payment holidays are not the same as missed payments.
Halifax said payment holidays do not adversely affect a customer’s credit file. It makes decisions based on a full understanding of customers’ individual circumstances and the affordability of repayments.
The FCA declined to issue a formal response when asked if mortgage prisoners who have paused payments would be allowed to benefit from the relaxed affordability rules.
A UK Finance spokesperson said: “A customer will not be eligible for the revised affordability assessment if they do not meet the requirements set by the FCA. When conducting affordability assessments for new or increased lending, lenders use data from a variety of sources.
“The regulator’s guidance states that consumers should not be considered to be in payment shortfall during a Covid-related payment deferral period.
“We would encourage anyone who can afford to make mortgage payments to do so as this will improve the chances of getting a mortgage with a new lender.”