In addition to the obvious health concerns during the COVID-19 pandemic, there has also been a huge impact on customers’ finances. Many have been placed on the government job retention scheme on a sometimes significantly reduced income, while others have struggled with increased costs as the whole family are at home all day, and sadly some have lost their jobs altogether. To address this, the government have announced several schemes to help people through these difficult times and the option of a ‘payment holiday’ on our mortgages was one of them.
Whilst a very welcome lifeline for some, it’s interesting to address the term ‘payment holiday’ as being a potentially harmful name marketed to customers.
The word ‘holiday’ suggests positivity and financial freedom, which indicates there aren’t any repercussions when applying for one.
Perhaps it should never have been advertised as a ‘holiday’ and rather just a ‘payment deferral’. In reality, payment deferrals should only be used when absolutely necessary and aren’t always the right option for the customer. Whilst the government have assured us, they won’t affect credit files moving forward, they could still be used to evaluate a customer’s financial situation as part of a lender’s assessment of a new application.
At Pepper Money, we assess each circumstance on a case-by-case basis and have applied that same personal approach when dealing with payment holiday requests.
With a large dedicated team of specialists speaking to our customers, we’ve been able to assign individual case managers to keep in regular contact and talk openly & honestly about their changing situation. We wanted to ensure that a ‘payment holiday’ was a suitable option for them initially and support them in coming back off it as their circumstances improve.
It’s incredibly important that brokers educate their customers on mortgage deferrals and that they understand they may pay more interest in the long-term if they don’t make those payments back up in the short term. I’ve spoken to many advisors over the last few weeks who’ve struggled to place a case for a customer who had taken the ‘holiday’ and had wished they’d spoken to them first. They may have been able to review other areas of their finances with them to free up the funds needed for the full monthly repayment to be made. At the very least, they’d have been able to explain the possible barriers in applying for a mortgage while still ‘on holiday’.
We’re seeing in the market already that lenders are asking more questions during the application process around those who have deferred their payments. Lenders have an obligation to lend responsibly when it comes to affordability and, in these uncertain times, this is more important than ever. Each case needs to be considered on both its long term and short-term affordability. What’s more, a customer’s willingness to pay is just as important as their ability to do so. The scheme was announced to help those whose circumstances changed as a result of COVID-19, and therefore those who’ve taken deferrals when they weren’t needed aren’t being looked at favourably.
That said, I think the government’s financial support to the public during the pandemic has been second to none. There’s been help offered for mortgages, unsecured credit, income support, and the job retention scheme, to name a few, and most of the customers who have taken this help have genuinely needed it. Where further support would have been welcomed is to the non-bank lenders whose cash flow has been heavily impacted to help these vulnerable customers. We don’t benefit from the Bank of England-backed liquidity schemes that are available to the banks and so funding, especially across the specialist sector, has been heavily impacted.
It’s unlikely that payment holidays will be something that sticks long-term, so the sooner a customer can confidently get back on track with their payments, the better. And this should be consistent advice across the industry to avoid people getting themselves in an unnecessarily sticky situation.