Mortgage payment holidays, otherwise known as payment deferrals, became mainstream in March 2020 as a way to give borrowers a temporary break from their mortgage commitments if they were struggling to pay.
At the time, many households were experiencing financial hardship due to furlough pay, or even redundancy. The promotion, and therefore the awareness of mortgage payment holidays has declined since the pandemic, when at its peak around one in six UK mortgages was on a payment deferral.
However, as the cost of living crisis takes hold, brokers are calling for lenders to remind customers about this option sooner rather than later, before they fall into arrears.
In our twice-yearly Mortgage Lender Benchmark, the largest piece of independent lender research carried out in the industry using broker feedback, we asked brokers what challenges they thought their clients would face in the next two years and consequently, what support brokers would like to see lenders offer.
Many brokers believe that borrowers may not realise that payment holidays are still an option, as they are not so readily promoted, but that they should reconsider this going forward.
When asked how they think lenders can better support their clients, brokers replied with answers such as:
“Payment holidays are key.”
“Be more flexible with payment holidays - in a similar way to COVID - as we are still in the aftermath of this.”
“Offer payment holidays if certain clients are struggling.”
Better communication is needed for payment deferrals
Mortgage payment holidays can be crucial for households struggling to make ends meet, but there are concerns about the possible long term effects from these payment deferrals. The government assured borrowers that their credit score would not be affected, however some found it harder or more expensive to remortgage afterwards. Despite the deferrals not appearing on credit reports, cautious lenders had, and may still have, fears about future affordability.
Improved communication may help borrowers better understand the terms of the agreement and deter those who do not have any real need to reduce the pressures on their household finances. Although a temporary reduction on household bills will always sound appealing, some borrowers reportedly used the deferred payments for home improvements, with some buy to let landlords investing in new properties, neither of which were within the terms of their agreement with the lender.
What other options are there?
With the cost of living swiftly increasing, brokers will be hearing first hand from their clients about just how hard they are finding it to manage their finances and can see that lenders have a great opportunity to help those for whom inflation is having the most impact. However, it would be crucial to ensure that support is targeted at those who really need it and not a handout to those who don’t.
Payment deferrals aren’t the only option when it comes to reducing the financial strain on borrowers. Our Mortgage Lender Benchmark report highlighted that brokers were keen to see lenders be creative and flexible in other ways too such as an increased tolerance for underpayments, a move to interest-only payments for a period, or extending the term of the mortgage to reduce payments, as all three options show that the borrower is still committed to their mortgage.
As the cost of living crisis progresses, real people are facing serious financial difficulties, and by advising their customers on mortgage payment holidays, lenders can make a difference to these struggling borrowers.