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The majority of homeowners who were plunged into financial difficulty at the start of the coronavirus outbreak have resumed making mortgage repayments following months of support from banks.
Only one in five customers who asked for a break from their mortgage payments have told banks they are still unable to afford their loan.
At the start of the pandemic mortgage lenders agreed to offer a three month payment break – or “mortgage holiday” – to customers who were struggling to pay. This scheme was extended in May to allow borrowers to delay repayments for a further three months if they were still facing financial issues.
At its peak, 1.9m homeowners had asked for a mortgage holiday according to the UK Finance, the banking trade body. This is equivalent to one in every six mortgages in the country.
However, mortgage lenders have breathed a sigh of relief as the number of customers saying they are in financial trouble has dropped significantly in recent weeks.
NatWest and Royal Bank of Scotland said 16pc of borrowers who originally requested a mortgage break had asked for it to be extended. At Nationwide, Britain’s biggest building society, 20pc of its customers who previously had help have asked for a second mortgage holiday.
Greg Cunnington of Alexander Hall, a mortgage broker, said many borrowers had taken a payment break as a precautionary measure, allowing them to build up their emergency savings pot using the cash saved by not paying their mortgage.
“This was seen as a safety net,” he said. “But we have seen less take up of payment holidays from clients since it was confirmed they can be extended.”
Mr Cunnington said many customers may have been unaware of the long-term implications of taking a mortgage holiday and resumed repayments once they understood the true cost. As interest continues to accrue during the payment break, this can potentially add thousands of pounds to the overall cost of the loan.
He added: “Many households were not completely aware of what deferred interest meant for them.”
A research note published by the TwentyFour Income Fund, which invests in mortgage books that are sold by banks, said users of payment holidays were more likely to be self-employed or buy-to-let investors. Self-employed workers were more likely to be struggling, particularly given Government support schemes were launched later than those for employees.
Property investors who took a payment holiday largely did so as a precaution, it said, fearing that tenants would be unable to pay rent.
Negative impact
Another reason the number of borrowers asking for a payment holiday has fallen is due to fears that that requesting help could affect their mortgage chances in future.
While banks have agreed not to leave a negative mark on the credit files of customers who took a holiday, some will factor this into decisions about whether to approve future loans.
For those with more than one property, such as landlords, requesting a payment holiday on one mortgage could prevent them from remortgaging others, or purchasing more homes.
Mr Cunnington said some lenders were not accepting new mortgage applications from customers who had taken a payment break, which could mean they pay higher interest rates on their existing loans.
“This is another reason for lower take-up on the payment holiday extensions,” he added.
Lenders have also taken steps to wean customers off mortgage holidays. This has included offering borrowers the chance to temporarily switch to an interest-only loan, where just the interest is paid off each month, or resuming repayments but at a lower level than before.
Others have gone further. Nationwide has pledged that it will not repossess any properties until at least May 2021. Henry Jordan, of Nationwide, said this had given customers the reassurance that they could resume repayments without fearing losing their home further down the line.
While the number of borrowers taking a mortgage payment holiday is falling, Mr Cunnington warned that this figure could spike later in the year if furloughed workers are made redundant when the scheme ends.
Borrowers can request a holiday until October 31.
“There is still uncertainty and some households are making the decision to not take a mortgage payment holiday while they can afford to pay using furlough payments,” Mr Cunnington said. “This will then give them the option of using the mortgage payment holiday further down the line if their circumstances change.”
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