In this series of weekly articles, Greg Cunnington, our Director of Lender Relationships and New Homes, looks to clarify how the mortgage market has been impacted by the COVID-19 pandemic, and what this means for you. In this latest part to the new series, Greg looks at what to consider before deferring mortgage payments for another three months.
More than 1.8 million households have taken a mortgage payment holiday since the government enforced lenders to offer these to any borrower who has been financially impacted by Covid-19.
As the initial deadline on these holidays has now passed the government confirmed a three month extension can be granted.
What’s more, it said the application period for a mortgage holiday will also be extended until 31 October so customers who have not yet requested a holiday will be able to do so.
As such, we have had lots of our clients ask us if they should extend their payment holiday, the implications of doing so and whether they should they now take one?
In this article we hope to help you to answer some of these questions.
What is a mortgage payment holiday?
A mortgage payment holiday is a period where your lender agrees to defer your mortgage payments – you may also see them referred to as a ‘mortgage deferral’ by some lenders. During this time, the interest due on your mortgage is added to the balance.
They apply to both residential and buy-to-let mortgages, therefore landlords can also seek assistance if their tenant’s rent payments are affected.
It is important to note this is a break in the payments to the lender, not in interest charges. As noted above, this means that during any payment holiday, the interest continues to accrue and your mortgage balance increases.
It will also mean at the end of the payment holiday the lender will typically increase your monthly payments slightly or increase the mortgage term.
What has changed?
The original Covid-19 mortgage payment holiday scheme was set up in March to allow clients to apply for a three-month mortgage payment holiday.
It was set with a cut-off of June to apply and no extension process was in place. As such, many people who took a payment holiday would shortly be coming to an end of this period, and also any new claim for a payment holiday would not have been possible.
The Financial Conduct Authority (FCA) has now confirmed the mortgage payment holiday period has been extended until 31 October, in line with the end of the Job Retention Scheme – more commonly known as furlough.
As such, those with payment holidays coming to an end can now apply for an extension up to a further three months.
Anyone who has not previously taken a mortgage payment holiday but wishes to do so can request one up until this new date.
Can anybody on a mortgage payment holiday apply for an extension?
Yes. The government and the FCA confirmed those on a mortgage payment holiday can apply for an extension for a further three months.
As such, all lenders must offer this facility and if you confirm you still require this due to being financially impacted by Covid-19 you will be eligible for this extension.
Lenders will differ in their approach as to how they assess these requests, but you should expect more detailed questions on your scenario and the lender may even want to contact you before confirming the extension.
Lenders are conscious that the accrued interest starts to become more of a significant sum for a six-month holiday than the initial three-month period.
Therefore, they want to ensure you understand the implications before committing to the extension.
Analysis by personal finance experts at money.co.uk crunched the numbers and calculated that taking the additional three-month mortgage holiday could add an extra £1,331.95 (£22.70 per month) to the full amount owed based on an average outstanding loan of £136,000.
One bit of advice we wish to reiterate is that by taking a payment holiday extension, you are essentially saying that you are in financial difficulty.
This could then impact your ability to acquire other mortgage options during the payment holiday period, with some lenders not accepting new mortgage applications for either a purchase or remortgage from clients currently on a mortgage payment holiday.
This is why it is so important that you receive advice before looking to request a payment holiday, and have ensured it is the best option for your circumstances. We can also help you to look at if coming off a payment holiday is the best option for you.
Does it affect my credit rating?
As long as you have set the mortgage payment holiday up directly with the lender and they have confirmed this has been formally granted, it will not affect your credit rating or credit score.
This is only for the confirmed payment holiday – any other missed or late payments would negatively impact your credit rating as normal.
If you decide to stop your mortgage payments without getting approval from your lender, your mortgage will go into arrears and this will affect your credit rating and potentially impeded your ability to apply for a mortgage or other credit in the future.
Please get in touch with us if you need any further advice. You can email us at AskAlexanderHall@alexanderhall.co.uk or use the contact us page on our website – click here.
This article was originally posted in What Mortgage online. You can see the original article here. Please note this will launch a new web page.