Britain's biggest lenders have revealed how they are going to implement the Government's promise of "payment holidays" for thousands of households affected by the coronavirus crisis.
UK Finance, the trade body for the major banks, said there will be a 'fast track' system for approval, but not everyone will be granted a so-called mortgage break.
The three month term – which has been initiated for those at risk of debt during the pandemic – will mean payments are 'paused', with the 90-day period added to the end of your total mortgage term.
During this time, interest will still be accrued, but individual credit ratings will not be affected.
"Firms will help customers the best way for the individual, but an automatic payment holiday may not always be the most suitable approach and may not be required by all customers," said UK Finance.
The banks have admitted the payment holidays are not a long-term solution but are designed only for a temporary income shortfall.
"This is not a solution where, because of a permanent reduction in income, a borrower is unable to afford anywhere near the full mortgage repayments and there is little prospect of an improvement in the situation in the foreseeable future," said UK Finance.
So what do you need to know if you're about to approach your bank for some debt relief?
We asked Nick Morrey, product manager at mortgage broker John Charcol for some answers to your biggest questions.
1. Will I be able to make an overpayment later on?
This depends on the lender, their systems and their small print on how much you can overpay.
The vast majority of residential mortgages allow you to overpay by up to 10% a year, and many lenders also have a regular monthly overpayment facility. However, not all buy to let mortgages permit these.
The advice for all borrowers is to check your mortgage offer and read the small print.
2. Will my mortgage be increased by 3 months or will the end date remain the same?
This is going to be clarified by most lenders in the next few days.
We have been asking lenders for this kind of detail but many have been holding back whilst they compose their official responses.
We expect that most will keep the term the same so that when the mortgage payments restart, they will be higher than if they extend the term by the three months.
In most cases, of the two options, despite having the higher payments, keeping the overall end date the same is better for the borrower.
Most people don’t have to actually retire bang on their 65th or 70th birthday so carrying on a few more months shouldn't be too much of a problem.
But lenders also have to adhere to industry guidelines which tell them they shouldn't lend beyond certain ages without proof of retirement income.
These are extraordinary times so they might choose to honour this right now. The borrower can also ask their lender to alter the term or to increase their payments a little to ensure it ends on or before their scheduled retirement date.
Borrowers should look to take a little responsibility on themselves to check their mortgage isn't going to end when they don’t want it to end and should take steps to make sure it doesn't.
Lenders are under a lot of pressure right now so we should all pull together to make sure everyone gets the best outcome for their needs.
4. Will interest be charged on interest as a result of the rolling up?
Yes. The full payments will simply be added to the outstanding balance, including interest owed.
This is a deferment of the payment and as most borrowers will not be in a position to pay it all off after three months, it will most likely roll over.
This is why paying the increase in balance off as soon as you can is the best option.
This depends on the lender and is one of the questions we have been asking lots of banks to clarify.
Not all lenders normally permit payment holidays in the first place, so this is unchartered territory – some banks have been working around the clock to formulate policies and procedures whilst also altering and creating systems to facilitate it.
The bottom line is most lenders treat payment holiday requests on a case by case basis and grant them on the borrower’s finances and circumstances. Some lenders do have terms and conditions that only permit one payment holiday in any mortgage term – however these are extraordinary times and the Government is urging the banks to cooperate.
6. How will it be recorded on my credit file?
Regulator the Financial Conduct Authority has credit scores won't be impacted by these mortgage breaks – however speak to your bank about this first for clarity.
My advice would be to ask the specific question to your lender over the phone and make a note of the date/time and the name of who you speak to.
It sounds a little dramatic, but if a mistake is made, given the unprecedented volume of payment holiday requests that are likely to be made, then getting your credit file updated correctly by a lender and a credit reference agency will be tough.
Being able to prove that you were told it would all be OK is a big step towards getting a positive outcome in the event of a complaint being required.
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