Mortgage arrears suppressed in Q1 with modest uptick recorded – UK Finance
The body said this was a “direct result” of financial support offered to borrowers during the pandemic.
The number of homeowner mortgages in arrears of 2.5 per cent or more of the outstanding balance rose by 230 to 77,640 quarter-to-quarter. Annually, this was a moderate increase of seven per cent.
Within this total, 28,100 mortgages were in early arrears of between 2.5 and five per cent of the remaining balance, a decrease of one per cent on the previous quarter.
In Q1 last year, there were 30,170 mortgages in the same level of arrears representing an annual seven per cent drop. UK Finance said the level of arrears at the time were due to payment difficulties faced by borrowers before support measures were brought in.
Since then, deferred mortgage payments have allowed these borrowers to catch up with payments and prevented them from falling into deeper debt.
This led to an overall decline in early homeowner arrears in 2020 and resulted in the low number seen in Q1 of this year.
UK Finance said it expected the number of early arrears to go up as forbearance is withdrawn and the true economic impact of the pandemic becomes apparent.
The number of buy-to-let mortgages in arrears of 2.5 per cent or more of the outstanding balance rose by 130 to 5,970 in Q1.
This was up by 35 per cent compared to the first three months of 2020, where 4,420 buy-to-let mortgages were in arrears of more than 2.5 per cent.
Again, the relatively low number was attributed to the support offered to borrowers by lenders.
Possessions dampened with pandemic bans
With a moratorium on involuntary repossessions and evictions during the pandemic, just 190 homeowner mortgaged properties and 180 buy-to-let mortgaged properties were taken into possession in the first quarter of 2021.
This was a quarterly rise of 40 and represented annual declines of 82 and 72 per cent respectively.
Although the Financial Conduct Authority (FCA) allowed firms to resume repossessions in November, lenders continued to pause possessions in line with the government’s ‘winter truce’ from December to January.
The bailiff eviction ban on rental properties was also extended until 31 May.
Possessions are expected to increase due to the backlog of cases that did not take place in 2020, UK Finance added.
Continued support essential
Andrew Montlake, managing director of Coreco, said: “Lenders and landlords alike have, quite rightly, been patient throughout the pandemic as many people struggled with their businesses, were put on furlough pay or sadly lost their jobs. This is reflected in these very low figures.
“As we start to emerge from the pandemic and all the various government support measures come to an end, there is, unfortunately, likely to be an increase in the number of repossessions.
He added: “The hope is that lenders and landlords continue to maintain a degree of forbearance going forward and that any move to repossess a property or evict a tenant is very much a last resort.
“Even when the pandemic technically ends, the financial problems many people will experience will only just be beginning.”
The 20 biggest mortgage stories of 2020
A herculean effort has been made by mortgage intermediaries, distributors and lenders to keep people moving and protect their savings by refinancing borrowers on to the best mortgage deals.
As the pandemic raged on, stories of government bailout packages, mortgage holidays and stamp duty savings dominated the news.
But they weren’t the only stories to make the top 20 biggest headlines on Mortgage Solutions this year.
Here’s a look back at the most read articles of 2020.
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Man uses fraudulent HMRC payments to put offer on £2.6m house
HMRC tax dodge campaign catches thousands of landlords
Boris Johnson plans 95 per cent mortgage scheme
‘Expect a government U-turn on stamp duty’ – Star Letter 18/12/2020
Two-year fixed mortgage rates hit three-year low
Mortgage lenders warned over risk from gambling addicts as credit card ban takes effect
Mortgage holiday extensions should impact credit rating – Nationwide boss
Lloyds Banking Group fined £64m for 500k mortgage arrears handling failures
Homebuyers stalling purchases until after Budget hoping for stamp duty cuts
Homeowners to receive £5,000 vouchers for green renovations
Sunak unveils further support for employees, self-employed and businesses
Landlords look to coronavirus bounce back loans as deposit for properties
Landlords have ‘huge opportunity’ to expand portfolios as stamp duty bills halved by chancellor
Landlords could be hit with 45 per cent CGT – reports
Santander cuts landlord income sources for BTL affordability
TSB launches first-time buyer range with lower stress rate
Arranging mortgages on high rise homes with cladding — what you need to know
House prices surge to recover lockdown losses – Halifax
Start by November or risk missing stamp duty savings, homebuyers warned
FCA maintains maximum six months deferral in mortgage payment holiday extension
However, borrowers will be limited to a maximum of six months payment deferrals under the regulator’s guidance with those who have already taken this much not being able to extend further.
The regulator also confirmed lenders can use payment holidays and take other information into account when making future lending decisions, although credit references should not be affected by a deferral.
The guidance is set to cover payments up to and including July 2021.
Borrowers who have not yet had a payment deferral will be eligible for payment deferrals of six months in total and will need to apply by the end of February to take full advantage of the forbearance.
Those who currently have a payment deferral will be eligible to top up to six months in total as will those who have previously had payment deferrals of less than six months. This includes those borrowers receiving tailored support and those who are behind on payments.
Firms will provide tailored support appropriate to borrowers’ circumstances and this may include the option to defer further payments, but it will not be under the rules of the FCA guidance.
“Payment deferrals under these proposals would not be reported as missed payments on a borrower’s credit file,” the FCA said.
“This does not mean that consumers’ ability to access credit will be unaffected in future, as lenders may take into account a range of information when making lending decisions.”
Repossessions and interest-only
The FCA has also confirmed that no one should have their home repossessed without their agreement until after 31 January 2021.
And for interest-only and part-and-part borrowers, the regulator has extended its delay of capital repayments to those wishing to do so after maturity as well as before maturity.
This means that borrowers whose mortgages matured from 20 March 2020 can delay the repayment of the capital on their mortgage until 31 October 2021.
This does not include bridging or unregulated buy-to-let mortgages however.
Sheldon Mills, interim executive director of strategy and competition at the FCA, said: “Today we have confirmed further support for borrowers struggling financially as a result of coronavirus.
“The announcement we have made today, ensures that the support offered through payment deferrals is as flexible and accessible as possible.
“This means borrowers will again be able to access payment deferrals up to a maximum of six months. However, if you are able to keep paying it will be in your best long-term interest to do so. Payment deferrals should only be taken when absolutely necessary.”
FCA chiefs fail to explain why borrowers were not told payment holidays would affect lending decisions
In a session with the Treasury Select Committee, neither FCA chief executive Nikhil Rathi or chairman Charles Randell explained why it took so long for consumers to be told about the impact of taking a payment holiday.
Rathi and Randell were being grilled on the subject by Labour MP for Mitcham and Morden Siobhain McDonagh.
McDonagh set out the timeline of the details being published compared to statements from ministers and the FCA.
“On 18 March the business secretary reassured those seeking a three-month payment break that it would not impact their credit record. On 20 March the FCA confirmed this,” she said.
“However, the FCA did not tell borrowers at this point that the mortgage payment holiday or deferrals could still influence banks’ willingness to lend to them, even if their credit scores or ratings were unchanged.
“Why was it not until the 22 May that the FCA added these warnings to the mortgage advice page and until 1 July for similar warnings to be put on the FCA’s loans, credit cards and overdraft webpage?” she asked.
Agencies or lenders
Randell said there were two different elements being considered in the situation – credit files maintained by credit reference agencies, and lenders making decisions about customers requiring the full detail of the borrower’s position.
However, he did not explain why there was a delay in being clear about the situation.
Rathi (pictured) said of the latest measures first announced Saturday: “We’ve been clear that the credit file masking is there for three months.”
He added that the FCA had been clear over the last week, that the credit score break did not mean lenders would ignore the additional indebtedness when making affordability decisions.
“It is important that when a lender makes a future lending decision they have an understanding of the overall indebtedness of a consumer,” he said.
‘We’re being straight now’
McDonagh responded sharply: “That’s not answering my question.
“To the lay person with a mortgage, they were told in March that if they took a payment holiday it would not affect them in the future.
“It took the FCA three months to put onto the website that indeed it would be taken into account.”
Rathi, who joined the FCA as chief executive in October concluded: “I wasn’t there in March, but we are being straight with borrowers now.”
FCA launches consultation on extended mortgage payment holidays
The new guidance will supplement the information given in March, which was later updated in June.
If a firm has dealt with a customer who reached the end of their payment holiday before the guidance was issued, it must review its approach if customers are still unable to make repayments.
The FCA said firms had the flexibility and scope to tailor their approach to help multiple customers. In this situation, there are no requirements on how customer information is collected or how the appropriateness of forbearance is considered.
To deal with large numbers of payment deferrals ending at the same time, firms are able to offer short-term support which is broadly suitable to certain types of customers. Firms can also offer support on less information than what is required under MCOB 13 but support must be reviewed in 60 days.
However, the FCA warned short-term support may not be suitable for those who need their circumstances assessed quickly such as the unemployed, those with a short time left on their term or with high levels of debt.
As stated in the additional guidance issued in September, normal credit reporting must resume at the end of a deferral from the status it was frozen at.
This will apply to customers who have had payment deferrals as well as those who experience financial difficulties as a result of the coronavirus after 31 January 2021, regardless of whether they have benefitted from a deferral or not, unless they are eligible for further support.
If a mechanism to repay accrued amounts is agreed at the end of a deferral, this should not result in negative reporting but subsequent credit reporting should resume as normal.
If customers are unable to reach a timely agreement due to firm’s operational issues and subsequently miss a payment which is reported to their credit file, firms must work with the Credit Rating Agency to rectify this and ensure no worsening status is recorded.
Also, no defaults or arrears charges must be levied to payments missed in these circumstances and customers should be returned to the position they would have been in if there were no operational issues.
For those who have not benefitted from any previous mortgage payment holidays, a full or partial payment holiday for three months must be offered unless an alternative means of support is more suitable.
The FCA said firms should act in the customer’s best interests with no regard to its own commercial interests.
It is not expected that the circumstances around the need to defer payments should be looked into, however enquiries can be made to offer alternatives, but this should not cause unnecessary delays.
Other means of support can include a shorter payment holiday, offering long term solutions such as an alternative product or a longer term as well as reducing or waiving interest.
Customers must be given sufficient information on the impact of a payment deferral, including personalised information on how it will affect their monthly payments or the term of their mortgage. Customers should also be informed that a partial deferral will have less of an impact on their financial circumstances.
Where personalised information is not available, firms should give customers the clearest information to help understand impact of payment deferral.
Firms should also give customers representative examples of how a mortgage payment holiday could affect them and they should also be directed to either online calculators either on the firm’s website or elsewhere so they can work out the loan balance, remaining term and interest rates.
At the end of deferral
When a customer has reached the end of their mortgage payment holiday, firms must distinguish between those who can resume payments immediately, those who are unable to resume due to circumstances arising from coronavirus, and those who have a payment shortfall.
Customers should be contacted in good time before the deferral period ends and have options explained to them. It should also be explained what will happen if they do not respond to communications.
If customer does not respond, a firm must proceed under the basis that they are able to resume full payments.
This can be a lump sum payment or the extension of the mortgage term unless it takes customer past retirement or is not legally possible.
Before capitalising sums, customers should receive personalised information on impact on monthly payments or mortgage term and firms must provide them with an estimate on costs. It should also be made clear that overpayments can be made instead of lump sum payments.
Payments should not automatically be capitalised if it will have a material impact on the customer.
If customers are treated as if they can make repayments but miss the following one, firms must contact them. If it turns out they are unable to repay the missed payment, additional help should be offered.
Customers who do not respond to communications after missing a payment should be considered as in a payment shortfall, the FCA advised.
If a customer is unable to resume payments after the first deferral, a full or partial deferral to an amount the customer believes they can afford should be offered unless alternative support is agreed upon.
If payments have resumed but the customer falls into difficulty, a full or partial deferral should be offered. This does not apply where a customer has agreed on an alternative option or has not maintained contractual repayments since the end of the deferral.
Firms should provide information describing the consequences for the total amount payable for those who are unable to resume payments or require extra help. It must also be explained that a worsening of their credit status will not be reported if a further deferral is taken, but lenders can take such information into account when making decisions.
Under MCOB requirements, missed payments covered by this guidance should not be considered a payment shortfall. However, if a new mortgage contract has been entered into, standard MCOB requirements apply and an illustration should be issued.
Firms must ensure staff are trained to implement processes and records must be kept to show how the support options presented were in the customer’s best interests.
Initial and further deferrals should also be recorded by firms, as well as any alternatives provided or problems affecting a customer’s ability to access support.
The FCA’s firm supervisors will be able to access firm records and outcomes of customer monitoring.
Debt and money advice
Firms should direct customers to free and impartial debt advice and money guidance.
To make referrals effective, firms should consider directing customers to digital tools, or offer to transfer a call directly to a debt advice provider. For those who may need specialised support, firms should direct customers to specialist services.
For customers who do not need debt advice, firms should suggest the customer sets up a budget or explain that it is better to pay for essential expenses and priority debts first.
The regulator said the consultation for this guidance was not statutory and asked firms to respond quickly as it said delays associated with publishing a formal consultation with a cost benefit analysis would go against customers’ interests.
Firms must respond by 10am on 5 November to FCAconsumercredit@fca.org.uk
Mortgage payment holiday window extended for six months
This means borrowers who have not yet taken a payment holiday but find themselves needing to do so, will be able to for up to six months.
And those who have taken one three-month holiday will be able to take a further one.
However, borrowers who have already used a full six-month payment holiday must seek support from their lender.
Customers are being urged not to contact their lenders yet.
Banks and building societies have already agreed the move with the regulator and the FCA said it was working with trade bodies and lenders on how to implement this as quickly as possible.
The regulator will be publishing a consultation on the updated guidance today which will clarify the details further.
Make payments if you can
Its announcement came alongside the prime minister’s confirmation of a further lockdown for England starting on 5 November running until at least 2 December.
“It is important that mortgage borrowers who can afford to do so continue to make repayments. Borrowers should only take up this support if they need it,” the FCA said.
It added: “Lenders will provide information soon on what this means for their customers and how to apply for this support.
“It may also be in the interests of mortgage borrowers who expect to have long-term financial difficulties to agree other forms of tailored support with their lender.”
Trade bodies UK Finance and the Building Societies Association (BSA) echoed their support for the measures.
UK Finance managing director of personal finance Eric Leenders said: “Lenders are providing unprecedented levels of support to help customers through the Covid-19 crisis and stand ready to deliver ongoing assistance to those in need.
“The industry is working closely with the FCA to ensure customers impacted by the new lockdown measures will be able to access the most appropriate support.
“Customers seeking to access this support do not need to contact their lenders yet. Lenders will provide information after 2 November on how to apply for this support.”
BSA chief executive Robin Fieth added: “Building societies and credit unions recognise the financial pressures on some households and will continue to work hard to support customers in the coming months, working closely with the FCA.”
Mark Harris, chief executive of SPF Private Clients said it was good to see such decisive action taken so quickly.
“Many borrowers will be worrying about paying their mortgage and extending payment deferrals for a further six months will provide them with some comfort.
“However, the advice remains the same – only ask for a payment deferral if you need one.
“Interest will still rack up and you will have more to pay off in the long run so the option should only be utilised by those who really need it.”
Mortgage payment holidays could trap prisoners on high cost loans
Lead campaigner Rachel Neale says mortgage prisoners, who pay higher-than-average interest rates, took a payment holiday believing it would not scupper their chances of switching to a high street lender under the Financial Conduct Authority’s (FCA) reduced affordability rules.
But during a meeting with UK Finance officials to talk about lenders’ adoption of the revised rules, Neale asked if a recent statement made by economic secretary John Glen that payment holidays may affect lenders’ decision to lend was correct. UK Finance confirmed it was true.
Glen’s comments were reported by the Mail on Sunday, and Mortgage Solutions has since seen sight of the letter.
Glen wrote that while credit files should be protected in accordance with FCA guidance when taking out a payment holiday, it may be that a lender’s willingness to lend is affected, particularly in the short term.
When the government issued its announcement on 22 May that the three-month payment holiday scheme would be extended it added a note which read: “Payment holidays and partial payment holidays offered under this guidance should not have a negative impact on credit files.”
However, on the same day the regulator issued its statement that said “credit files aren’t the only source of information which lenders can use to assess creditworthiness”, sparking concern from brokers over how lenders would treat borrowers who had paused payments.
Neale said: “We met with UK Finance and asked them if it was correct that people can be refused a mortgage if they have taken a mortgage payment holiday. They said yes, they can be refused help because the FCA has given banks and building societies that permission.”
Neale says lenders are not acting in the spirit of the initiative which was to help borrowers, including mortgage prisoners, during the pandemic.
She added: “We were told that if mortgage prisoners had taken a three-month payment holiday, banks and building societies may assess them under the reduced affordability assessment, but any longer than that and it would be unlikely they would be accepted.
“It is utterly unfair how the UK public is being misled. We were told a payment holiday would not impact borrowers moving or borrowing during these times.
“We have again been let down by the government in this along with a mortgage industry that will not look to help those paying the highest price.”
‘Lenders can delve deeper’
Around 1.9 million mortgage accounts are currently in the payment deferment scheme, according to Experian. Its analysis found that a quarter of those who had paused their payments had not seen any reduction in their disposable income and were using the scheme to shore up cash for the future.
Mortgage brokers have been warning borrowers of the risks of taking a payment holiday they may not have needed.
Association of Mortgage Intermediaries chief executive Robert Sinclair said: “There is a definite gap between what was intended when Rishi Sunak announced this as a benefit to consumers and the FCA’s statement.
“When Sunak’s office said taking a payment holiday will not impact on your credit file, he meant it won’t impact you at all.
“But the statement that later followed from the regulator gave lenders the right to reflect on whether there have been deferred payments using other means, like missing unsecured credit payments or reviewing their credit history.
“Lenders have been told they can delve deeper.”
Kate Davies, executive director of the Intermediary Mortgage Lenders Association (IMLA) said it was “understandable” that lenders would want to take a closer look at the financial position of a borrower who has yet to return to their monthly payments or who has applied for an extension to their first payment holiday.
Lenders would want to establish why the holiday was requested and whether borrowers’ income had been affected.
“While the FCA does allow lenders to carry out modified affordability assessments, the rules state that this can only take place when a borrower is up to date with their mortgage repayments,” added Davies.
“By definition this does not include borrowers who have taken a payment deferral and thereby have not repaid outstanding sums due on their mortgage.
“However, each lender will have a different approach to how they underwrite these cases, and they will take into account the impact of repaying the deferred amount to make a prudent and responsible lending decision.”
What lenders are doing
Only three lenders have openly confirmed they are using the flexible affordability assessment to offer mortgage prisoners a remortgage.
West Bromwich Building Society said it does not hold mortgage payment holidays against borrowers but they must confirm there have been no changes to their income or expenditure because of the pandemic.
NatWest states on its Mortgage Prisoner hub that payment holidays are not the same as missed payments.
Mortgage Solutions asked Halifax how it would view a mortgage prisoner who had taken a payment holiday.
The bank said payment holidays do not adversely affect a customer’s credit file. It makes decisions based on a full understanding of customers’ individual circumstances and the affordability of repayments.
The FCA declined to issue a formal response when asked if mortgage prisoners who have paused payments would be allowed to benefit from the relaxed affordability rules.
A UK Finance spokesperson said: “A customer will not be eligible for the revised affordability assessment if they do not meet the requirements set by the FCA. When conducting affordability assessments for new or increased lending, lenders use data from a variety of sources.
“The regulator’s guidance states that consumers should not be considered to be in payment shortfall during a Covid-related payment deferral period.
“We would encourage anyone who can afford to make mortgage payments to do so as this will improve the chances of getting a mortgage with a new lender.”
Borrowers used mortgage payment holiday to build reserve fund – Experian
A further quarter of households on a payment holiday have seen their disposable income increase, choosing to take the payment holiday to build up a reserve fund in case their future earnings decline.
Currently, around 1.9 million mortgage accounts are in the payment deferment scheme. The average balance of a borrower who has taken a payment holiday is £150,000, 30 per cent higher than the £114,000 average balance of a borrower who has not used the scheme.
Mortgage applications increased year-on-year by 13 per cent in July, followed by rises of 25 per cent in both August and September and the market is on track to lend £216bn this year, according to the analysis.
Due to the lockdown restrictions, lending is expected to be down on last year’s total of £250bn.
Lisa Fretwell, managing director of data services at Experian, said: “People moving home is good news for the economy, as activity in the property market fuels growth in related services.
“Most moves require a mortgage and, while lenders want to extend new loans, they have a responsibility to ensure homebuyers are only taking on what they can afford in the long-term.
“Covid-19 has complicated the financial situation for millions of people, and the challenge for lenders to understand each applicant’s circumstances has become more difficult as a result.”
Virgin Money mortgage book shrinks as customer deposits grow
The group said this was a reflection of the closure of the housing market between March and May.
As of the 17 July, the bank has granted 67,000 payment holidays to homeowners, which accounts for around 20 per cent of all mortgage borrowers. Around 70 per cent of its borrowers have matured from their first payment holiday and approximately 31,000 payments remain in force.
Business borrowing increased by 5.7 per cent in the quarter, to £8.8bn, as business owners made use of the government’s support schemes. The bank has support around 25,000 business customers with lending arrangements.
Customer deposits increased in Q3 by 4.8 per cent to £67.7bn largely due to lower personal customer spending during lockdown and business customers maintaining higher levels of available cash.
The bank has so far lent £619m of bounce back loans and £248m of Coronavirus Business Interuption Loans as at end June
David Duffy, chief executive, said: “In a severely disrupted environment we are delivering on what we set out in May; to safeguard the health and wellbeing of our colleagues, customers and communities while protecting the bank.
He added: “We know that things may yet get more difficult for many of our customers, but we are determined to continue to support their needs where we can and to fulfil our role in the economic recovery.”
In it its interim financial report, published at the end of the March, Virgin Money said it had decided to put its rebranding project on hold.
The group wants to change Yorkshire and Clydesdale Bank branding to Virgin Money. Duffy said the group had now decided to restart the plans.
Payment holiday credit records and mortgage prisoners will be FCA ‘priority’ – Rathi
Chief executive designate Nikhil Rathi, who is due to start his role on 1 October, also defended the need for lenders to retain a record of borrowers who had taken a mortgage payment holiday.
Rathi told the Treasury Select Committee of MPs that he was aware of the plight of the mortgage prisoners and this would be a critical starting point for him.
“On the mortgage prisoners, I know there’s been some progress with respect to affordability tests and enabling consumers to understand they can switch,” he said.
“But there remain some issues to resolve, particularly the take up by banks of the new affordability freedoms that the FCA has put in place and I will look to take that as a priority.
“I recognise there are also some Treasury issues to this dimension as well.”
The mortgage prisoner action groups have been urging HM Treasury to grant the FCA a wider remit to bring inactive and closed book lenders under the regulator’s rules.
This was supported by previous FCA chief executive Andrew Bailey.
However, despite this Treasury has failed to bring any legislation to Parliament to enable this and repeatedly rebuffed campaigners calls for other support.
Mortgage payment holidays
The committee also raised the issue of mortgage payment holidays being recorded on borrowers’ credit profiles and preventing them from remortgaging.
Rathi defended the approach of firms, saying it was a “difficult balance to strike” but it was essential to ensure that people were borrowing what they could afford.
“I understand that is an issue and there is considerable discussion about how to make sure that credit impairment doesn’t result from taking holidays for legitimate reason,” he said.
“But also that the integrity of the credit database is maintained so that people do not take on unsustainable debt.
“If they’ve taken holidays, debt will accumulate and they may not be in a position to take on more debt with a new lender and that’s a difficult balance to strike.”
He added that he was not completely on top of all the detail, but he would be giving the issue close attention.
Rathi also confirmed reports he had established a limited liability partnership (LLP) in order to manage buy-to-let properties bought with his wife and mother-in-law.
The incoming CEO said having received tax advice the partnership was established as the best way to manage the arrangement and was not done for tax advantages.
“As this was more than just my wife and I, we felt it was important to put it on a formal footing and established a partnership – that would be a robust way to manage issues now and in the future,” he said.
“The partnership, as compared to other ways of owning, has the benefit of enabling a property to be used for personal reasons should that be needed, and we had some specific family circumstances which might have made that necessary in the near term.”