Millions of homeowners have taken a break from paying their mortgage, but as the Covid-19 scheme of mortgage payment holidays comes to an end, what are your options?

In order to help households who might be struggling with their finances during lockdown and the current pandemic, the regulator told banks they had to allow homeowners the chance to put their mortgage payments on hold for three months.

This was then extended to allow people a second three-month holiday as the pandemic dragged on. There are more details on how the scheme worked here. 

However, the current scheme ends on 31 October, meaning that homeowners only have until that date to apply for a mortgage holiday. But the financial woes of some households will not be
magically solved at the end of October, so what happens to homeowners then?

WHAT HAPPENS NEXT

UK Finance, the trade body for banks, said that one in six homeowners have now taken a mortgage holiday. Anecdotal evidence shows that for some people this is a precautionary measure, where they aren’t completely unable to pay their monthly mortgage payment but wanted to give themselves some breathing space in their finances should tougher times be ahead.

Other people may have used the payment holiday while they were furloughed but are now back at work on their previous salary and their finances are unchanged. For these people the mortgage holiday ending won’t be a huge issue. UK Finance estimates that 70% of those who took a mortgage holiday have started to make full payments.

But there will be some households who haven’t seen an improvement in their finances or indeed have seen their financial situation get worse. With the furlough scheme set to end at the end of October too and expected to bring with it a rise in unemployment, the mortgage payment holiday scheme ending could come at the worst time for some households.

NEW DRAFT RULES INTRODUCED

The regulator, the Financial Conduct Authority, has now issued some draft rules for mortgage providers on what they should do. Firstly, they should contact the homeowner ahead of the mortgage holiday coming to an end to let them know what their options are and warn them they may have to start repaying soon.

Secondly, they will have to offer up some options for those households who are still unable to pay their mortgage. But the FCA says it will move from the current blanket scheme to the banks offering more bespoke solutions for homeowners. In reality, this means the bank will look at your finances and help work out the best option for you.

This might mean you’re offered another payment holiday for a certain amount of time. However, you could also be given the chance to switch your mortgage to a different type that’s more affordable each month. For example, if you have a capital and interest mortgage you could switch to an interest-only mortgage. This means you’ll only be paying the interest on the loan, rather than paying off any capital, so your monthly payments will be smaller but it will take you longer to pay off the debt.

Another option could be extending the term of your mortgage, so that you’re spreading the debt repayment over a longer timeframe and therefore reducing your monthly costs. This means the debt will cost you more in the long term as you’re taking out the loan for longer and so paying interest for longer, but could give much-needed breathing space now.

IMPACT ON CREDIT RATING

One big change from the end of October is that any of these measures could have an impact on your credit file, which could affect your future borrowing. Until now the mortgage payment holiday scheme is not meant to show on your credit record, but from the end of October the regulator said that any measures will. This could make it harder for you to get a new mortgage in future or other borrowing – although it depends on the route you take and what your credit score is already.

Another thing to be wary of is that banks are going to be under even greater strain to help customers – which probably means long wait times before you can speak to anyone. Moving away from a blanket one-size-fits-all approach to a more bespoke solution for each homeowner is clearly more time intensive for the bank’s customer service team to deal with.

RESPONSE TIMES

Many banks had very long wait times for customers on the phone at the start of the Covid-19 crisis but these have eased since. However, if more customers are calling and needing more help that takes longer to solve it feels inevitable these wait times will rise again.

The regulator said it expects banks to staff their customer-facing teams to meet this demand and ensure they are sufficiently trained, while also using more experienced staff to deal with trickier customers.

If you’re not sure what you should do or which option to take it’s worth speaking to Citizens Advice or StepChange to get some impartial advice on your options and the pros and cons of each.

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