Mortgage payment holiday: how will it affect your credit score?
Rishi Sunak yesterday announced a package of measures to further support homes and businesses impacted by the rapid spread of coronavirus.
As part of the second daily briefing on the pandemic, Sunak said: “Following discussions with industry today, I can announce that for those in difficulty due to coronavirus, mortgage lenders will offer at least a three month mortgage holiday – so that people will not have to pay a penny towards their mortgage while they get back on their feet.”
While a positive step to help those concerned about keeping up with their mortgage payments during these unprecedented times, will it impact your credit report or score in the long-term?
YourMoney.com spoke to two of the largest credit reference agencies (CRA) to see what happens next:
Lenders can offer ‘payment holidays’ to customers facing exceptional circumstances outside of their control. During such payment holidays an individual’s account – and therefore the information provided to the credit reference agencies – should not be recorded as having any form of detrimental arrears.
This is in line with the principles outlined in the “Data Quality Reference Guide”, as outlined by SCOR (Steering Committee on Reciprocity). This is an industry and sector wide reporting guidance document ratified by the ICO, Credit Reference Agencies and organisations providing data into the CRA database.
It is not uncommon for organisations that provide information to the credit reference agencies to allow forbearance, or a payment holiday at times of illness.
Payment holidays can be a feature of a lending product or where the lender chooses to offer a payment holiday in exceptional circumstances outside of the customer’s control. During this payment holiday the account should not be recorded as having any form of detrimental arrears.
It is down to each organisation to decide how and if they wish to allow any forbearance and at what stage.
Should a lender agree to offer forbearance or a payment holiday to a borrower, we would expect a lender to report a status code ‘U’. This would not have a negative impact on a consumer’s credit score.
How will the mortgage payment holiday work?
Banking and finance industry body UK Finance said customers who are concerned about their current financial situation should get in touch with their lender at the earliest opportunity to discuss if a mortgage payment holiday is a suitable option for them.
It’s an automatic payment holiday where a mortgage repayment is deferred for a period. The monthly payment changes to zero, and interest accrues for the period. This may be particularly appropriate where there is a temporary shortfall of income. But UK Finance said a payment holiday may not always be the most suitable approach and may not be required by all customers.
UK Finance said the offer of a payment holiday can be made to customers not already in arrears and up-to-date with payments.
It explained that under FCA rules, lenders must ensure that any forbearance offered enables recovery through full repayment of arrears, minimises the long-term impact of arrears, and that the mortgage remains affordable and sustainable. Overall, forbearance needs to minimise the risk of possession.
Where customers are already in arrears or in financial difficulty, lenders will consider the full suite of forbearance options that are ordinarily available to customers under existing rules.
“However, 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.
“Where repayments are deferred for a time, the borrower will need to make up these repayments in the future, which could be over the remaining term,” it added.