Covid-19 mortgage payment holidays – pro’s and con’s
By Andy Thurston
The UK government announced in March 2020 that anyone affected by the impact of Covid-19 and the various lockdown measures and travel restrictions that are in place, or expects to be adversely affected will have the option of taking a mortgage payment holiday for a period of 3 months. Initially this was targeted at homeowners with residential mortgages however it was expanded the following day to include landlords with BTL mortgages.
Borrowers can apply for the payment holiday by contacting their lender and self-certifying that their income will be directly or indirectly affected by the Covid-19 pandemic. As this is a self-certification process the lender does not need to review or approve the application, so a mortgage payment holiday is essentially an option that is available.
Whilst it is perhaps an easy option to apply for a payment holiday regardless of your personal situation, there are several factors that should be considered.
Do you really need to take a payment holiday? There is no application required so if applied for, a payment holiday should be granted, however if you are a landlord and your tenants are currently paying rent then there should be no reason to request a mortgage payment holiday at this stage.
A prudent landlord should have sufficient cash reserves to cover void periods for at least a couple of months so should not require a payment holiday unless all tenants stop paying rent immediately which in turn would cause significant financial pressure. The tenant profile of a portfolio is likely to influence the level of cashflow impact i.e. a portfolio consisting of primarily ‘gig worker’ tenants would be harder hit than a portfolio of tenants from the emergency services. If there are cash reserves in place, then a landlord should consider deploying these funds to make the mortgage payments before approaching the lender for a payment holiday.
A mortgage payment holiday does not mean that the payments for the 3 months are written off, most lenders will simply add the payments that were due to the mortgage balance therefore increasing future monthly payments as interest will have accrued during the holiday period. The FCA have confirmed that interest on mortgage balances will still be charged unless a lender has stated otherwise. The increase in the mortgage payment will be relatively minimal compared to the previous amount due however this should still be considered. Some lenders may require the payments to be made up in a shorter time period so our advice would be to speak with the lender in question and find out how they will look to implement this.
If the landlord makes the decision to take a mortgage payment holiday, then this should not impact on the individual’s credit history. The FCA have issued guidance which makes it clear to lenders that a borrower taking a payment holiday will not have a negative impact on their credit payment history.
Whilst taking a payment holiday should not adversely impact the payment history on the credit file some thought should be taken as to how the current lender, or indeed lenders in the future may view the action taken by a borrower to apply for a mortgage payment holiday, particularly those that apply as soon as the scheme has been made available.
A lender is unlikely to publicly announce that taking a payment holiday will have a negative impact on the borrower in the future however some lenders’ risk teams may consider this when underwriting new applications in the future.
A borrower requesting a payment holiday immediately, perhaps even before a tenant was due to make a payment. The lender may take the view that the borrower is abusing the system in order to retain cash or has poor financial management.
If the borrower has pipeline applications in with a lender to refinance an existing property or to purchase a new property (for example) but requests a payment holiday on an existing mortgage with that lender it is likely the lender will pause new applications. The lender will want to investigate the borrower’s cashflow position in more detail and may ask for a detailed explanation/business plan. Alternatively, the lender may choose to reduce LTV’s on new applications or may decline considering any new business for the borrower on the basis of their wider affordibility.
A borrower applying to a lender for a BTL mortgage but has existing BTL mortgages with other lenders – the new lender may request information regarding the performance of the existing portfolio and if any payment holidays are currently in place. The new lender may be reluctant to support new borrowing if the applicant is already receiving assistance with cashflow from other lenders – responsible lending being one of the main considerations.
These are clearly challenging times for everyone, and some landlords may be experiencing more problems than others - everyone’s individual circumstances are likely to be different. The above points are just some things to consider prior to opting for a payment holiday however if you have any mortgage concerns then you should look to speak with your lender to discuss in the first instance.