Join Hafta-Ichi to Research the article “Payment holidays are ending in the UK – but there are options”
Millions of UK borrowers have been granted payment holidays since the start of the coronavirus pandemic but 31 October is the official end date for the schemes covering mortgages, credit cards and loans. However, that doesn’t mean people struggling financially will be left high and dry.
So says the main financial watchdog, whose main message is that “help is available after 31 October”, with a range of short- and long-term options to assist those finding it hard to keep up with payments because of the Covid-19 crisis.
For some mortgage holders this could include making no or reduced payments for a period “to give you time to get back on track”, or extending the repayment term to bring down the monthly cost, says the Financial Conduct Authority (FCA).
More than 4.4m payment holidays have been granted across mortgages, credit cards and personal loans since the start of the outbreak and 31 October is the cut-off date for the final applications.
The number of people on a payment holiday has fallen sharply in the last couple of months – earlier this month the figure stood at 323,000. However, with the next few months set to be very challenging for many households, here we look at what’s happening with the various schemes and the options.
At the end, we take a look at the situation regarding credit cards, personal loans and overdrafts, as well as mortgages and other products.
Since the start of the pandemic, lenders have granted a total of 2.5m mortgage payment holidays.
If you have not taken one yet and wish to, or you have had a mortgage payment holiday already and feel you need another one, you might just about still have time, as you have until close of play on 31 October to apply (they typically last for three months). Alternatively, you could ask for a partial payment holiday, where you make reduced payments.
The FCA says it has put in place a package of support for people in difficulty to ensure help is available during the coming weeks and months. So if you find that you still can’t afford your mortgage, or you are about to lose income again because of local coronavirus restrictions, there are a number of options that should hopefully keep you financially afloat.
Personal finance experts often say that keeping a roof over your head is paramount and maintaining your monthly mortgage payments is crucial. But Covid-19 has come at a time when interest rates are at historic lows. If you opt to defer some or all of your mortgage payment for a while, you can make the case that low interest rates mean the financial pain is not that great.
The number of people still on a mortgage payment holiday is relatively low – it stood at 162,000 on 9 October. But the economy is clearly very fragile and local lockdowns are likely to lead to increased financial difficulty for many people.
According to the banks, support for mortgage customers may include:
• Extending the length of your mortgage term.
• Changing the type of mortgage you have (in other words switching to interest-only for a time).
• Deferring monthly payments.
All of these have merits as well as downsides, and depending on circumstances you may be able to mix and match. But you will have to negotiate with your lender. Some will be more open to suggestions than others.
Changing your mortgage from a repayment basis to interest-only sounds a bit technical but it is easy and has a dramatic effect on monthly payments. Let’s take a £150,000 mortgage with 22 years to run, where the interest rate is currently 2%. Switching to interest-only cuts the monthly cost from £703 to only £250 a month. You will want to get back on track sooner rather than later or you will have a large lump sum to pay when the mortgage reaches the end of its term. But as a short-term stopgap measure while you find a new job or wait for your industry to recover, it’s a good option, especially if your partner remains in work.
Extending the length of the mortgage term has a more limited immediate impact. If you extend the 22-year term on the £150,000 mortgage in the example above to 25 years, the cost drops to £636 a month. Useful, but it is not going to rescue you if your income has collapsed. Extending the term to 30 years cuts the cost to £555 a month – but means you have the mortgage around your neck for another eight years. However, the aim is that you increase payments again when your financial situation improves.
“The starting point for any borrower who needs help is that because interest rates are so low, deferring interest won’t cost you that much,” says Ray Boulger at the mortgage broker John Charcol. “If it takes a year, or even two, it’s actually a small price to pay for peace of mind and keeping your home.”
He points out that if someone is on a 2% mortgage and does not make any payments for six months, the capital balance of the mortgage will increase by only 1%. Annoying, but not the end of the world.
Some borrowers will be concerned that even asking for help will wreck their credit record. While it is true that if you don’t pay, it is formally a breach of contract, lenders are under intense pressure from the government to offer forbearance. They have also been told not to start repossession proceedings except in the most extreme circumstances.
Don’t put off seeking help. Even the banks are saying this, nudged by the regulators. Of course, the banks’ official line is that it will always be in the best interests of customers to resume making payments on their mortgage (or loan, credit card, etc) if they are able to do so.
The FCA says that going forward, support will be available to people who have previously taken a payment holiday and those finding themselves in financial difficulty for the first time. It says banks and other lenders “should be flexible and offer a full range of shorter- and longer-term options, tailored to reflect customers’ individual circumstances” – including taking account of any local restrictions.
In addition to things such as extending the mortgage term, this could include making no payments for a specified period, making reduced payments or restructuring the mortgage.
But be aware that if you need more help to get back on track after a payment holiday ends, or you are given new support after 31 October, to quote the FCA, “that extra support may be reflected on your credit file”. In other words, any missed payments or defaults could have a big impact on your credit score going forward, whereas previously, taking a payment holiday did not affect your credit rating.
Finally, for some people there may be another possible option, which is less extreme than it first sounds: sell your house and rent instead. There is a reason why banks are currently not lending so much to first-time buyers – they think house prices are heading for a fall. If you have some equity in your home, selling up, sitting the market out for a year or so and renting instead may work for some. There is always some risk attached to being “out of the market” but perhaps less now than in previous years.
What about other financial products?
Since the pandemic began, millions of current account holders have benefited from temporary overdraft measures. Typically this means the first few hundred pounds of an authorised overdraft is interest-free for a period, and often this happened automatically.
In many cases this support has ended. However, until close of play on 31 October, you can ask your bank for up to £500 of overdraft borrowing with no interest for three months, and if you have already received this help for three months, you can request it for another three.
From 1 November, banks will continue to provide support but this will be tailored to people’s individual circumstances. The FCA says this could include measures such as reducing or waiving interest, or moving the debt over to an alternative credit product offering “more favourable terms” – ie a lower interest rate and/or lower charges.
Credit cards and personal loans
Almost 100,000 credit card payment holidays are still in place, plus more than 60,000 temporary payment freezes for personal loans, although in each case that is only a small fraction of the total granted and most customers have now resumed making repayments, according to industry data.
Nevertheless, there will still be tough times ahead for many. If you are facing temporary financial difficulties because of the pandemic, you have until close of play on 31 October to apply for a payment holiday.
From 1 November, when it comes to a long list of financial products including credit and store cards, personal loans, catalogue credit, payday loans, motor finance, rent-to-own (where people pay for items such as washing machines on a weekly basis) and buy now, pay later deals, the FCA says that if you are struggling, firms should: provide help tailored to your individual circumstances; be flexible and offer a full range of options, which could include giving you a temporary break from making payments, or reduced payments; give you time and not put pressure on you to repay your debt within an unreasonably short period; put in place arrangements that are affordable and take account of your wider financial situation including other debts; and be particularly responsive to the needs of vulnerable customers.
There is nothing preventing a company from deciding to cancel someone’s credit card, store card or catalogue credit but if the person depends on it for meeting essential living expenses – which could include things such as school uniforms and items needed for a baby as well as housing costs and utility bills – they should tell their lender immediately.
Also, be aware that, as with mortgages, any support you receive could have an adverse impact on your credit score.
Source: The Guardian
Keyword: Payment holidays are ending in the UK – but there are options