The Financial Conduct Authority (FCA) has announced proposals to allow homeowners whose finances have been affected by COVID-19 to extend their mortgage payment holidays by three months.
The regulator proposes that borrowers yet to apply for a payment holiday should be able to do so until 31 October, and firms should agree to extend current payment holidays for a further three months if customers say they are experiencing financial difficulties.
It says customers who can afford to return to making full payments should do so, but that anyone who needs further should be able to access it. Lenders have until 26 May to respond to the proposals, after which the FCA will provide further guidance. We’ll update this guide when more information is available.
Below, we answer your questions on mortgage holidays and speak to a homeowner who successfully deferred his payments within hours of the policy being launched.
- What is a mortgage payment holiday?
- Do I qualify for a payment holiday?
- Do I need to have the coronavirus?
- Will I pay more in interest?
- Will I need to go through affordability tests?
- What happens after the three months?
- 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
- Help for tenants
What is a mortgage payment holiday?
A mortgage payment holiday is when your monthly mortgage repayments are paused for a set period of time.
Do I qualify for a payment holiday?
Mortgage payment holidays of up to three months are available to all 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 the 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.
The Financial Conduct Authority (FCA) guidance urges mortgage lenders to not consider commencing repossession proceedings unless they can ‘demonstrate clearly that the customer has agreed it is in their best interest’.
On 22 May the FCA proposed that the current ban on repossession of homes should continue to until 31 October.
Do I need to have the coronavirus?
You don’t need to have contracted or have been tested positive for the 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: our advice on the coronavirus
Will I pay more in interest?
Yes. You’ll still owe the bank the same capital amount as you do now, but interest will continue to accrue on this. This means it will take you longer and cost you a little more to clear your mortgage.
With this in mind, homeowners who aren’t concerned about their ability to pay should continue with their repayments as normal.
FCA guidelines published on 20 March clarified that lenders shouldn’t charge any additional fees to set up a payment holiday.
- Find out more: how mortgage payments work
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.
What happens after the three months?
After three months, your lender will contact you to assess your circumstances and agree on a manageable way for you to make up the deferred payments.
Lenders will provide a range of options, which may include extending your mortgage term or altering your monthly payments if it’s affordable to do so.
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.
As we mentioned earlier, 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?
The credit reference agencies Experian, Equifax and TransUnion have confirmed that homeowners will have their credit scores protected when they take out a mortgage payment holiday.
The agencies have introduced a special measure called an ’emergency payment freeze’. This will mean credit scores will be maintained at their current level for the duration of the payment holiday.
This formal announcement follows guidance from the trade body UK Finance in March, which stated mortgage providers must ‘make every effort’ to ensure payment holidays don’t damage credit files.
- Find out more: what a payment holiday will look like on your credit report
What if my credit report is wrongly affected?
Mistakes can happen, however.
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?
Banks may discover you’ve taken out a payment holiday when you apply for further borrowing in the future.
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 now 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, 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.
Help for tenants
The government has also announced emergency legislation to protect tenants from eviction.
The reforms mean landlords won’t be able to start proceedings to evict social or private tenants for three months.
UK Finance says tenants should contact their landlord or managing agent if they will have problems paying their rent.
In turn, landlords should then contact their mortgage lender to discuss their options regarding mortgage payment holidays, which should then be passed on to their tenants.
- Find out more: government guidance on protection for renters
Our advice on the coronavirus
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.