Lenders have punished desperate homeowners who took loan repayment holidays from their bank at the peak of the pandemic with higher mortgage rates and rejections for new loans.
According to new rules introduced in March 2020, customers who had been struggling financially or had been furloughed, could ask their mortgage lender for support in the form of payment holidays. Encouraged by the promise that a holiday would not affect credit files, around 2.9 million homeowners agreed to deferred payments.
Yet many of these borrowers have begun to lose out, some by as much as thousands of pounds, as they are forced onto more expensive mortgage rates. Landlords, as well as owner-occupiers, who were forced to take a mortgage holiday when tenants ceased paying rent, have also been punished for their generosity.
According to a survey of 500 borrowers by comparison website NerdWallet, an estimated 10pc of mortgage customers have had an application rejected because they took a repayment holiday.
Matt Coulson, of mortgage broker Heron Financial, said whereas mortgage holidays had been offered by many as a ‘no strings attached’ solution, the reality was very different. He has had several clients explore the possibility of obtaining a new deal with their existing lender to avoid moving onto a standard variable rate. But they were unable to do so until they paid all of their outstanding holiday payments. Other customers have hit obstacles when moving house and trying to find a mortgage with a new lender, he said.
Standard variable rates, typically more expensive than other deals, can cost borrowers hundreds of pounds more each month.
Agreement to waive rules only voluntary
As the holiday scheme permitted struggling homeowners to ask for a six-month payment deferral, the City watchdog, the Financial Conduct Authority (FCA), sought to protect consumers by saying banks could not put a black mark on the credit files of customers as a result.
Nonetheless, the rules allow mortgage lenders to examine bank statements to discover whether a payment break was taken. The fact that they can force customers to disclose this information renders the promise effectively worthless. Mr Coulson added that if an existing lender knew a borrower was in an awkward position financially and asked them to repay in full before permitting them to switch rates, that is a punitive action and not in the spirit of the rules.
Although the lenders were factually correct that the information has not been added automatically to credit files, the majority of them have included a question about it. And the answer yes opens a can of worms.
Despite the fact there is an industry agreement in place under which lenders have waived the rules that would prevent customers on payment holidays from qualifying for a product transfer, the agreement is voluntary.
Private rental sector adversely affected
Around half a million private renters could fall into rental arrears by the end of the year as job losses adversely affect landlords and tenants.
In some cases, landlords are being asked to prove they have enough cash to cover three months’ rent for each property. A third of members of the trade organisation National Residential Landlords Association (NRLA) have lost more than 10pc of their income, and as many again are planning to sell some properties or leave the sector entirely.
The banking trade body, UK Finance, has said that during a payment deferral period, monthly payments which are not paid would not be reported to credit reference agencies as aggravated arrears. However, the company said it was important to be aware that credit files are only one factor used by providers when making lending decisions.
John Ellmore of NerdWallet said the situation was ‘incredibly frustrating’ for mortgage applicants, especially when they are rejected for reasons that are unkown to them or largely beyond their control. He added that applicants who have taken advantage of loan repayment holidays as a result of the financial pressures caused by the pandemic may find themselves unfairly targeted, epecially when the use of such schemes was not intended to limit their ability to access credit in the future.