Mortgage lenders will continue to offer mortgage payment holidays to some financially vulnerable customers after the government scheme ends, the City watchdog has confirmed.
While the scheme officially ends at the end of next month, the Financial Conduct Authority said that banks and building societies can continue to offer payment holidays for borrowers who need short-term support.
From November banks won’t be under any obligation to do this however, and the FCA has now confirmed that taking a payment holiday will affect a borrower’s credit report once the scheme ends.
This means that taking a mortgage holiday could affect the borrower’s ability to secure any further finance in the future.
Customers yet to apply for a mortgage payment holiday have until 31 October to do so
The FCA said it will be ‘monitoring firms to ensure borrowers are treated fairly’ once the scheme ends in October.
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.
‘However, it is very important that consumers who can afford to resume mortgage payments should do so for their own long-term interests and so that help can be targeted at those most in need.’
Eric Leenders, managing director of personal finance at banking trade body UK Finance, said: ‘It is essential that customers go online or contact their lender to consider the best solution for them.
‘Firms will be communicating with customers whose mortgage payment deferral is coming to an end to discuss the options available. Those who can afford to resume payments should do so, as it will always be in their best interests in the long run.’
Mortgage payment holidays will cost you more
Banks will rake in hundreds of millions of pounds in extra interest off the back of the payment holidays already granted, especially from those borrowers who opted for a six month rather than a three month holiday.
For example, if you took a three-month payment holiday for a mortgage that started in January this year of £100,000 with 20 years remaining at the average two-year fixed rate of 2.24 per cent, then after your mortgage holiday your monthly payments will go up from £505 to £515, and you’ll pay an additional £955 in interest over the lifetime of the mortgage.
However, taking a six-month holiday on the same terms would see the total interest over the life of the mortgage rise to £1,945.
The financial watchdog has encouraged firms to continue offering support to borrowers
This is more than double the three month holiday, because the interest on the loan compounds while you’re not paying it.
If you want to do the sums for yourself, broker Habito has a mortgage holiday calculator which you can find here.
Taking a mortgage holiday could also severely hamper your ability to refinance in future.
While doing so before 31 October shouldn’t affect your credit score, industry insiders claim that some lenders are already starting to automatically decline applications for those who have taken a payment holiday.
Zane Groves of financial adviser firm Light Blue said: ‘If you don’t need a mortgage break, don’t take one. It may be used against you in a future mortgage application, although this is yet to be proven on a large scale.’
How does a mortgage holiday work?
At the moment, lenders are offering borrowers three ways to defer their mortgage payments.
Some borrowers will be able to extend their loan, effectively adding the extra three months onto the end of their term.
Others are being offered the opportunity to increase the mortgage size but keep the same term length.
This means that the mortgage will be paid off over the same period, but the borrower will be paying slightly more each month once payments start again.
Remember though, with both these options you will be paying interest on the sum accrued, meaning you’ll pay more interest overall.
Another option that some lenders are offering is a shorter term repayment plan, giving the borrower the opportunity to pay the debt back sooner over a period of, for example, six months.
Not all lenders will be offering all borrowers all of these options. Speak to your lender to find out which one you might be able to take.
Normally a payment holiday is granted on a case-by-case basis with financial hardship and general situational factors taken into account. From November, lenders will likely go back to using this approach.