Over 1.2 million households were granted mortgage holidays by their lenders following the outbreak of the Covid-19 pandemic, a move aimed at providing support to those struggling with repayments.
Under the scheme borrowers who came to an arrangement with their lender were allowed to hold off making payments for three months. This period was extended for another three months to allow struggling borrowers to take advantage of deferrals until the end of October.
With the October deadline looming, the Financial Conduct Authority (FCA) today released draft guidance to mortgage providers on how they might continue to support customers beyond this point.
It said lenders must tailor support they provide customers who are struggling financially due to Covid. It suggested a range of measures they could use post-October including lengthening the term of the mortgage and ‘restructuring’ the loan.
It also suggested, as a short term measure, lenders could offer “no or reduced payments for a specified period to get them back on track”.
If the proposals go ahead, the responsibility will be on individual firms to decide whether to offer payment deferrals after October.
Credit file risk
Under the current mortgage holiday support measures borrowers who defer their payments in agreement with their lender will not see these missed payments reflected in their credit report.
However, the FCA said, were lenders to extend borrower’s payment holidays beyond October, the missed payments would appear on their file.
This was to ensure lenders in the future could understand their full circumstances and reduce the risk of giving them loans they may not be able to manage.
Christopher Woolard, interim chief executive of the FCA, said: “It is important that consumers who can afford to resume mortgage payments should do so.
“However, we understand that borrowers facing payment difficulties because of the pandemic will continue to face uncertainty and may also experience temporary interruptions in income.
“We are proposing that firms contact their borrowers in good time before the end of a payment holiday, and work with them to come up with a tailored plan to help get them back on track. Firms should not take a ‘one size fits all’ approach.”
Why borrowers should be cautious
Although the proposals have been welcomed by mortgage experts, they issued a warning to anyone considering additional support.
Charlotte Nixon, mortgage expert at Quilter Financial Planning said “Some of the strategies posed include allowing customers to switch to longer term mortgages to reduce their monthly payments to help deal with any change in finances as a result of the virus.
“These are big decisions that could have long term impacts on someone’s finances so it is important that customers seek professional help if they can, before making any decisions like this.
“Mortgages are often the biggest single piece of debt anyone takes on in their life and it is important to make sure that any decision works both for the short and long term if possible.
More expensive
“Extending the term of a loan means it will cost more over the lifetime of the product so it is a decision that requires careful thought. For most people it will only be the right move if they face imminent financial difficulty.”
Nixon also pointed out that if any additional help were recorded on borrowers’ credit files it could impact their future borrowing capacity.
“It is important to exercise caution,” she warned. “Taking defensive measures now to avert a financial crisis could have a lasting impact in years to come if you find it more difficult to obtain credit when you come to remortgage.”
[box style=”4″]
What Mortgage has teamed up with L&C to offer you expert advice on the right mortgage deal.
Whether you’re buying a new home, remortgaging to a new deal or buying an investment property, L&C can help – and you’ll pay no fee for their advice. To find out more, click here.
[/box]
