Homeowners whose finances have been affected by COVID-19 can apply for a three-month mortgage payment holiday until 31 October, after which banks will be expected to offer tailored support to those still in financial difficulty.
Two million homeowners have taken out mortgage payment holidays since the start of the coronavirus outbreak, and new guidance from the Financial Conduct Authority (FCA) has offered an insight into what will happen once payment deferrals end.
The regulator has confirmed that banks should offer a range of short and long-term support options to borrowers, although those who need extra support will have this reflected on their credit reports.
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 had coronavirus to apply?
- 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 repayments are paused for a set period of time.
Under the government’s policy, you can apply for a payment holiday of up to three months.
Homeowners with ongoing payment holidays can now ask their lender to extend them for a further three months, and those who are yet to request a payment holiday can do so until 31 October.
Do I qualify for a payment holiday?
Payment holidays of up to three months are available to 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.
The FCA guidance has urged mortgage lenders to not consider commencing repossession proceedings unless they can ‘demonstrate clearly that the customer has agreed it is in their best interest’. Repossessions are currently banned until 31 October.
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 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.
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
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 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 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?
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.
However, the FCA has confirmed 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.
As mentioned earlier, any additional support you are applying for after your payment holiday will be reflected on your credit report.
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 brought in emergency legislation to protect tenants from eviction.
Last week, it announced a four-week extension to the current ban on evictions, meaning courts won’t be allowed to hold eviction hearings until 23 September at the earliest.
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
Which? calls for extension of COVID-19 financial support
We’re calling for the financial regulator to extend its help for consumers facing financial difficulties due to COVID-19 into 2021.
Our submission to the FCA recommends the following protections to prevent households facing a financial cliff edge when payment holidays, interest-free overdrafts and the furlough scheme come to an end.
- Payment holidays should be extended by three months until 31 January 2021. Lenders should continue to offer options such as payment rescheduling or freezing interest, if they are right for the customer.
- It’s too early to return to existing forbearance rules, as firms with stretched resources will be unable to offer tailored support to struggling customers.
- Credit reports should be unaffected by payment holidays. Anyone who accesses a payment holiday must not have their long-term creditworthiness negatively impacted.
- Timescales for complaints should be reduced so consumers can get urgent support. We have seen cases of slow handling of complaints by banks and the Financial Ombudsman.
Gareth Shaw, head of money at Which?, says: ‘The regulator has acted quickly and effectively to help those struggling due to the pandemic, but it must be prepared to take further bold action to prevent millions of people from being hit by a perfect storm of financial pressures in the coming months.
‘The huge number of payment holidays taken highlights the scale of financial difficulty people in this country are facing – a situation that is likely to become worse as support measures such as the furlough scheme come to an end.
‘The regulator must treat all consumers fairly – ensuring that financial support is still provided to those who need it and also available for those who may face financial problems for the first time after 31 October.’
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.
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- Coronavirus: what it means for rent, mortgages, savings, loans, banking and benefits
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- 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 15 September 2020 with confirmation of the FCA’s guidance for extending support after 31 October.