Article in iNews for Finance Section
Here I wrote a long feature on payment holidays in relation to the pandemic back in 2020.
The coronavirus has had a catastrophic impact on the UK’s finances. Government borrowing has surged and the economy suffered its worst contraction in 41 years between January and March.
On a microeconomic level, a quarter of the UK workforce is being covered by the Government’s furlough scheme, and millions of individuals are facing financial uncertainty.
The debt charity StepChange estimates that 1.2 million people are behind on utility bills and almost 600,000 on rent.
The government has offered the option of a “payment holiday” for those who are struggling to make ends meet. This is an agreement between an individual and their lender to pause a regular payment for an agreed period of time.
StepChange says around 2.7 million people have taken up some form of payment holiday since lockdown towards the end of March.
But while these packages provide short-term relief, it is unclear what the long-term impact could be when it comes to paying back the loans.
Here, we run through the different types of help currently available and what may happen as the UK adjusts to the new normal.
How a payment holiday works
The option of a mortgage payment holiday has been available since lockdown began on 23 March. This has since been extended and homeowners now have until 31 October to apply.
Applicants are asked how long they want to take a break from their repayments, with a maximum limit of three months. Most banks are open to online applications. Response times vary from two to seven working days.
After the three months is up, the payments begin again.
Although this may seem appealing to anyone who holds a mortgage, financial commentators such as Martin Lewis are encouraging homeowners to only apply if absolutely necessary because interest still accrues during the mortgage holiday. Those who have only a short time left to repay their mortgage should ideally hold off if they can.
To work how much your monthly payments would rise after taking a mortgage holiday, you can use this Moneysupermarket mortgage calculator.
If you are struggling to pay your mortgage, contact your lender to check if they offer a payment holiday.
Lenders have expressed concern that customers are instead just cancelling direct debits. Cancelling direct debits is not the same as a payment holiday and will negatively affect your credit score.
Options for tenants
Renters may be in a more precarious situation than homeowners, as they typically have a lower income relative to their housing costs.
This means that, on average, renters have less disposable income. The Citizens Advice charity estimates that 2.6 million renters are – or are at risk of – being behind on their bills.
However, the government has taken steps to protect tenants. There is currently an eviction ban lasting until 23 August. This means tenants cannot be evicted from their homes during this time. Similarly, repossessions of properties for homeowners will not be allowed until 31 October.
There have been mixed opinions towards the eviction ban. Commentators are concerned renters are building up debt they may struggle to ever pay back. Even if landlords give tenants permission to take a break from rent payments, the money will have to be paid back eventually.
Amina Gichinga, a member of the London Renters Union, says: “Unless the government takes action to cancel the debt that hundreds of thousands of renters are in because of the coronavirus pandemic, it simply kicks the can down the road”.
There is also relief for people on the other side of renting, with landlords also able to opt for a three-month mortgage payment holiday on buy-to-let properties.
Credit score impact
Many are wondering if payment holidays will impact their credit scores, and the answer should be no.
However, these holidays will show up on your latest balance, so lenders will be able to see if you have taken one. But most importantly, payment holidays should not show up as missed payments or mass arrears.
The way in which the government is handling payment holidays is through an “emergency payment freeze”. The three main credit score companies – Experian, Equifax and TransUnion – apply the payment freeze to the relevant credit score after lenders have agreed a holiday.
In order to maintain a healthy credit score, borrowers must make sure they continue to make the agreed payments. Make sure an emergency payment freeze has been agreed with your lender and check your credit report every month for any mistakes.
Help and advice
Applying for new credit will trigger a search to check you are likely to repay the loan. This won’t harm your credit score but making more than one application in a short period of time could have a negative impact.
For those concerned about their financial future, the National Debtline charity has a free helpline and offers debt management plans and advice. Email info@nationaldebtline.org or call 0808 8084000.
Alternatively, the Mind mental health charity offers advice on its website.
