Financial experts are warning that if you take a mortgage payment holiday to help with hardship during the coronavirus pandemic, your credit rating and your ability to borrow money could be affected in the future.
The government announced on March 17th that homeowners who were up to date with their payments could apply for a mortgage holiday during which payments would be suspended, and one in six mortgage payers opted to apply.
The idea was to offer financial help to homeowners who might have been placed on furlough on reduced income during the coronavirus crisis.
The mortgage holiday plan was later extended to cover landlords with buy-to-let mortgages.
In April the Financial Conduct Authority announced further measures including a temporary freeze on loans and credit card payments, allowing anyone to suspend payments temporarily to avoid accounts falling into arrears.
The FCA said that lenders should ensure that these temporary measures should not impact credit reports and scores, and the UK’s three main Credit Reference Agencies (CRAs), Experian, Equifax and TransUnion agreed to an ‘emergency payment freeze’ ensuring that an individual’s credit score would not be not affected over the duration of the agreed payment holiday.
The temporary payment freeze could apply to mortgages, loans, credit cards, store cards and catalogue credit, and could cover a payment holiday, reduced payments, or increased credit limits.
However, while the CRAs have pledged to protect credit scores during the coronavirus pandemic, experts are now warning that taking a mortgage holiday or other temporary payment free could have long-term effects on your credit applications in the long term, as lenders may be able to determine whether borrowers have taken a payment holiday and may take this into account when assessing a credit application.
Now at the beginning of July the first applicants for a mortgage holiday have to decide whether to resume payments or extend the mortgage holiday.
Speaking on BBC Radio 4’s Today programme, mortgage broker Lisa Orme of Keys Mortgage warned that taking a mortgage holiday or other temporary payment suspension may show up on your credit record in later years. “It’s a classic case of people not understanding what credit profiling is” she said.
“There is a general lack of understanding of what an ability to get finance is – my advice right from the beginning was not to take these (mortgage holidays) unless as an absolutely last resort, when you literally can’t pay your mortgage.
“We know anecdotally some people have used them to pay off credit cards, pay for holidays, pay for cars, or just have a slush fund in the bak account.
“Despite all these promises that this won’t affect your credit file, I absolutely guarantee this will come back and bite you – so don’t take them unless you absolutely have to.”
Some borrowers, Lisa Orme says, don’t understand the long-term implications of taking a mortgage holiday. This information may be accessible through the Open Banking system, which makes financial information available to potential lenders. The FCA’s updated guidelines for mortgage payment holidays confirm that this could be the case.
Speaking on the same programme, Tom Martin, mortgage director at one of the UK’s biggest lenders, the Halifax, confirmed that potential lenders take account of all sorts of information before making a decision, including whether borrowers have taken a mortgage holiday.
“Yes, as a responsible lender we base our decisions on a full understanding of customers’ individual circumstances and affordability” he said. “But we recognise these are unprecedented times and we will consider individual circumstances.
And Sarah Coles, personal finance analyst at Hargreaves Lansdowne, confirmed that lenders would be more careful about who they lent to in future. “They’re really worried about what’s going to happen to people’s incomes and what’s going to happen to house prices, whether people will end up in negative equity, so they’re really going to be crushing down on their lending criteria. So when you come to remortgage the impact of your mortgage holiday will add up with the all these other things – this will be just another thing that counts against you.”
With the mortgage holiday period and the ban on repossessions coming to an end in October, the threat of rising unemployment and a recession means that experts are predicting that many mortgage payers may find themselves in an increasingly difficult situation.
So before you consider applying for a mortgage holiday or other repayment freeze, these are some points you should consider:
- If you can’t afford to pay, discuss a mortgage holiday rather than just stopping payments
- Taking a mortgage payment holiday shouldn’t affect your payment status with your existing lender.
- Continue to make your regular payments until you have discussed your mortgage holiday with your lenders.
- Consider either a mortgage holiday, lower payments or in the case of a credit card account, increased credit limits.
- Make an agreement on the length of time the mortgage holiday should last (up to three months).
- Make sure your mortgage holiday or payment freeze applies to every one of your lenders.
- Keep checking your credit score with the CRAs and contact your lender if you spot any mistakes.
Most of all, remember that financial experts are warning that if you take a mortgage payment holiday to help with hardship during the coronavirus pandemic, your credit rating and your ability to borrow money could be affected in the future.