The chancellor, Rishi Sunak, has announced the introduction of a three-month payment holiday for mortgage customers. This will provide borrowers, who have been financially impacted by COVID-19, with some breathing space. For borrowers in this situation it presents an opportunity to engage with their lenders and ultimately put measures in place to avoid a ‘worry’ becoming a ‘problem’.
Addressing financial difficulty is advisable, and is certainly not something to be ashamed of. Outside of unprecedented situations like COVID-19, people often face financial challenges around various life events, even when they embark on a new career path. When a borrower falls into arrears things can unravel very quickly, and it is likely to have an impact on their credit rating, which will reduce their ability to borrow money in the future. It is also a very unfavourable situation for lenders as it means they need to hold additional capital against the exposure, which reduces their ability to grow their loan book. Lenders will, therefore, welcome early engagement with any borrower who is facing challenges. Borrowers who engage early with their lender are also very likely to have more options available to them than if they delay.
The message is simple - borrowers who are worried about missing mortgage payments in the future or have already missed a payment, you should take the important first step and contact your lender as soon as possible.
This is also the case for those who are interested in applying for the three-month payment holiday. As noted on the government’s ‘Money Advice Service’ website, there will be a fast-track approval process in place for this. For those eligible, it is likely the scheme will reduce or pause the borrower’s monthly mortgage repayment, but it should not be viewed as ‘free money’. The interest and capital that was due during the three-month period will still need to be repaid over the term of the mortgage, and an approach for doing so will need to be agreed with the lender. This means increasing the borrower’s monthly repayment amount following the end of the scheme. Alternatively the lender may consider maintaining the existing monthly repayment amount (subject to interest rates) and extend the term of the mortgage.
Having said this, the precise arrangements for a three-month mortgage holiday will be specific for the borrower, and can only be agreed following a conversation with the lender.
While interest continues to accumulate during three-month mortgage holiday, meaning the borrower will need to pay more in the long-run, it should protect the borrower’s credit rating and provides a window for them to get their finances in order.