Brokers have welcomed the government’s move to extend its payment holiday scheme for an extra three months, but warn that it may have a detrimental impact on borrowers’ future ability to secure a mortgage.
The FCA says that to minimise the impact of the coronavirus crisis, it has “made sure that there is no negative impact on the credit files of consumers who have been granted a payment deferral”.
However, while a spokeswoman for the regulator says that “credit files will show that consumers have been up-to-date with mortgage payments for the duration of the payment holiday”, she concedes that “lending is a commercial decision for firms based on their own credit risk appetite and the criteria which they choose to set.
“This means that, in practice, lenders may use sources other than credit files, such as bank account information, to take account of other factors in their lending decisions. These factors could include changes to income and expenditure, and also any increased indebtedness as a result of interest accruing during the payment holiday”.
West Yorkshire Money managing director Adele Forbes worked as an underwriter before becoming a broker, so has a unique insight into lenders’ thinking with regard to risk.
Forbes says: “When reviewing applications I expect lenders to look at the industry in which clients are employed and how it has been affected by Covid -19. I would expect all lenders to be extra vigilant when checking clients’ bank statements, mortgage documents and savings reserves.
“They are likely to be concerned about how quickly borrowers ran out of money, and if a client took a payment holiday, I suspect lenders will factor that into their affordability assessments. It will be bad news for those who took a payment break just because they could and underlines why the scheme should only be used when absolutely necessary.”
Chapelgate Private Finance associate director Georgina Morley agrees that payment holidays have been a positive step to address the immediate cashflow problems faced by some borrowers, but warns that there could be a lasting impact.
She says: “One consideration is the length of time over which the borrower required a payment holiday. The longer this period was, the more it will have eaten into their available equity, which in turn could increase their borrowing requirements, should they wish move.”
Morley explains this could leave borrowers requiring higher loan-to-value deals, where lenders are likely to apply even stricter criteria and where product choice is more limited, particularly in the current market.
Whatever provision the FCA has made to help consumers protect their credit scores, Morley says there is no disguising the fact that a borrower has taken a payment break.
“Lenders will clearly be able to see which borrowers have taken payment holidays and for how long, as their credit file will show an increasing mortgage balance and it will be clear from bank statements that payments were not made,” she says. “This may influence a lender’s decision as they may determine that the applicant had made no provision for a change in circumstances, such as redundancy or a drop in income. With uncertainty around the virus and the economy for the foreseeable future, a lender may deem the borrower to be too great a risk.”
Xpress Mortgages director Rachel Lummis says: “I do believe that taking a mortgage payment holiday will have an impact when making an application in the future.
“I expect the lender will want to know why the borrower took one, what their current situation is and ensure that there are no affordability issues going forward. Questions will most certainly be asked.
“We have already seen that some buy-to-let applicants who have taken a payment holiday with a lender and either been in the process or then applied for a new mortgage with the same lender are being told their application cannot continue.
“The mortgage payment holiday scheme is a lifeline to many and the right thing to do. But others who took a payment break without absolutely needing to may regret doing so further down the line.”