Most homeowners who were plunged into financial difficulties at the beginning of the coronavirus epidemic have resumed repaying their mortgages after months of bank support.
Only one in five customers who asked for a break from mortgage payments told banks that they still cannot afford the loan.
At the start of the pandemic, mortgage lenders agreed to offer a three-month payment break – or “mortgage vacation” – to customers who had difficulty paying. This scheme was extended in May to allow borrowers to delay repayments for an additional three months if they still face financial problems.
At its peak, 1.9 million homeowners had applied for a mortgage vacation according to UK Finance, the commercial banking institution. This equates to one in six mortgages in the country.
However, mortgage lenders have given a sigh of relief as the number of clients who claim to be in financial trouble has declined significantly in the past few weeks.
NatWest and Royal Bank of Scotland stated that 16% of borrowers who originally requested a break from the mortgage had asked for it to be extended. At Nationwide, the largest British construction company, 20% of its customers who had previously had help asked for a second mortgage vacation.
Greg Cunnington of Alexander Hall, a mortgage broker, said that many borrowers have taken a payment break as a precautionary measure, allowing them to build their emergency savings pot using the money saved by not paying off the mortgage.
“This was seen as a safety net,” he said. “But we have seen less absorption of payment holidays by customers since it has been confirmed that they can be extended.”
Cunnington said that many customers may not be aware of the long-term implications of a mortgage vacation and have taken over the repayments once they understand the actual cost. As interest continues to accrue during payment interruption, this can potentially add thousands of pounds to the overall cost of the loan.
He added: “Many families were not fully aware of what the deferred interest meant to them.”
A research note published by the TwentyFour Income Fund, which invests in mortgage books sold by banks, says that payment holiday users are more likely to be self-employed or private investors. Self-employed workers were more likely to be in difficulty, particularly given that government support plans were started later than those for employees.
Real estate investors who took a payment holiday largely did so out of precaution, fearing that tenants would not be able to pay the rent.
Another reason why the number of borrowers applying for a payment vacation has decreased is due to the fear that such a call for help will affect their mortgage possibilities in the future.
While banks have agreed not to leave a negative mark on the credit files of customers who have taken a vacation, some will insert it into decisions about whether to approve future loans.
For those with more than one property, such as owners, applying for a mortgage payment vacation may prevent them from repatriating others or buying multiple homes.
Cunnington said that some lenders do not accept new mortgage requests from customers who have made a payment break, which could mean they pay higher interest rates on existing loans.
“This is another reason for less use of payment holiday extensions,” he added.
The lenders have also taken steps to wean customers off mortgage holidays. This included the ability to offer borrowers the option to temporarily switch to an interest-only loan, where only interest is paid out monthly or resume repayments but at a lower level than before.
Others have gone further. Nationwide has promised that it will not get hold of any property until May 2021 at least. Henry Jordan, of Nationwide, said that this gave customers the confidence to be able to resume refunds without fear of losing their home later on.
While the number of borrowers on a mortgage payment vacation is decreasing, Cunnington warned that this figure could increase later in the year if the laid-off workers were laid off at the end of the scheme.
Borrowers can apply for a vacation until October 31st.
“There is still uncertainty and some families are making the decision not to take a mortgage payment vacation while they can afford to pay using basic payments,” said Cunnington. “This will give them the opportunity to use the lower mortgage payment vacation if their circumstances change.”