Mortgage lenders will continue to offer mortgage vacations to some financially vulnerable customers after the government scheme has ended, the city’s watchdog has confirmed.
Although the settlement officially expires at the end of next month, the Financial Conduct Authority said banks and building societies can continue to offer payment holidays to borrowers who need short-term support.
As of November, however, banks are no longer required to do this, and the FCA has now confirmed that taking a payment vacation will affect a borrower’s credit report once the arrangement ends.
This means that taking a mortgage vacation can affect the borrower’s ability to obtain further financing in the future.
Customers who have not yet applied for a mortgage holiday have until 31 October to do so
The FCA said it will “ monitor companies to ensure borrowers are treated fairly ” once the scheme expires in October.
Christopher Woolard, interim chief executive at FCA, said: “Some consumers will still be affected by the coronavirus in the coming months, or for the first time.
‘Consumers in these situations will benefit if companies offer them tailor-made support.
“However, it is very important that consumers who can afford to resume their mortgage payments do so for their own long-term interests, so that aid can be directed to those most in need.”
Eric Leenders, director of personal finance at banking organization UK Finance, said: “It is essential that customers go online or contact their lender to consider the best solution for them.
‘Companies enter into discussions with customers whose mortgage payment deferment is expiring to discuss the options. Those who can afford to resume their payments should do so as it will always be in their best interest in the long run. ‘
Mortgage holidays cost you more
Banks will bring in hundreds of millions of pounds in additional interest on the vacation days already allotted, especially from those borrowers who have opted for a six-month vacation instead of a three-month vacation.
For example, if you took a three-month payment vacation on a mortgage that started in January of this year from £ 100,000 with a remaining 20 years at the average two-year flat rate of 2.24 percent, your monthly payments will start after your mortgage vacation. from £ 505 to £ 515, and you will pay an additional £ 955 in interest over the life of the mortgage.
However, if you take a six-month vacation on the same terms, the total interest would increase to £ 1,945 over the life of the mortgage.
The financial watchdog has encouraged companies to continue to provide support to borrowers
This is more than double the three-month vacation, because the interest on the loan is settled while you do not pay it.
If you want to do the sums for yourself, real estate agent Habito has a mortgage holiday calculator which you can find here.
Taking a mortgage vacation can also seriously hinder your ability to refinance in the future.
While this shouldn’t affect your creditworthiness before Oct. 31, industry insiders claim that some lenders are already starting to automatically decline applications for those who have taken payment vacation.
Zane Groves of financial adviser Light Blue said, “If you don’t need a mortgage break, don’t take one. It can be used against you in a future mortgage application, although this has yet to be proven widely. ‘
How does a mortgage vacation work?
Right now, lenders offer borrowers three ways to delay their mortgage payments.
Some borrowers can extend their loan, effectively adding the extra three months towards the end of their term.
Others are given the option to increase the mortgage size but keep the same term.
This means that the mortgage will be paid off in the same period, but the borrower will pay a little more each month once the payments start over.
However, remember that with either option, you pay interest on the amount accrued, which means that you generally pay more interest.
Another option that some lenders offer is a shorter term repayment plan, which gives the borrower the option to pay back the debt more quickly over a period of, say, six months.
Not all lenders will offer all of these options to all borrowers. Talk to your lender to find out which ones you can potentially take.
Normally, paid time off is granted on an individual basis, taking into account financial difficulties and general situational factors. From November, lenders will likely start using this approach again.
Some of the links in this article may be affiliate links. If you click on it, we can earn a small commission. That helps us fund This Is Money and use it for free. We do not write articles to promote products. We do not allow commercial relationships to affect our editorial independence.