With the mortgage payment holiday scheme set to end at the end of October, many homeowners will be reassessing their finances now. What will this mean for borrowers?
One of the first measures the government introduced towards the start of lockdown was mortgage payment holidays. This scheme was brought in to help people manage borrowing costs during the pandemic and lockdown. While it was initially only meant to last for three months, the government since extended it to 31st October.
Borrowers can still apply for a payment break or arrangement until that date. After this point, though, they will need to make alternative arrangements with their lender. What’s more, any payment plan set up after the end of the scheme could negatively impact the borrower’s credit score. While the mortgage payment holiday was seen by many as a ‘free pass’, due to lenders’ assurance that it wouldn’t affect future borrowing ability, this is set to change.
What happens after the scheme ends?
Taking a mortgage payment holiday means that a borrower defers mortgage payments for a period. The loan still continues to accrue interest though, and the lender adds this on. This means that, once payments recommence, they are likely to be higher than before.
Habito created a calculator to help work out how much a payment break would cost. From the outset, experts have urged people to only apply for the scheme if they have no other option.
Like homeowners, landlords affected by coronavirus have also been able to set up a payment break. It applies in the same way, and can help in cases where tenants cannot pay rent. However, research shows only a minimal number of landlords have applied for the scheme.
Another option for many buy-to-let landlords and property investors is to switch to an interest-only mortgage. This significantly lowers monthly payments without impacting credit. Landlords can apply for this type of mortgage regardless of the coronavirus situation.
For many who take this option, the sale of the property at the end of the mortgage term pays off the outstanding balance. Others may prefer to switch to interest-only on a short-term basis to reduce monthly outgoings. You can then switch back to a standard payment plan in the future, but payments will be higher.
Vital lifeline for many
According to Miles Robinson of mortgage broker Trussle, mortgage payment holidays have been a “vital lifeline for some homeowners”. But he warns that any additional financial support from lenders after the deadline could affect your credit rating in the long run.
“It’s important to know that unlike before, if you need financial support from your lender after 31st October, it will be marked on your credit file. We’d urge homeowners to only utilise the mortgage payment holiday if it’s essential.”
“Anyone considering a mortgage payment holiday should also be aware that once the mortgage payment holiday is up, your monthly payments will increase slightly.”
The Financial Conduct Authority (FCA) is urging lenders and banks to offer further help to borrowers. It has stated that it will monitor the sector to ensure there are options for those who are struggling.
Christopher Woolard, interim chief executive at the FCA, said: “Some consumers will continue to be impacted by coronavirus in the coming months, or be impacted for the first time.”
“Consumers in these situations will benefit from firms providing them with tailored support.”