So, this week Mortgage Solutions is asking: If mortgage holidays are extended, should they be means tested to prevent unnecessary use?
The logistics behind lenders being able to achieve that would be particularly challenging in these circumstances.
I can’t see a lender putting these provisions into place if a 12-month extension comes into play. Saying that, I can’t see the mortgage holidays moving past the furlough period, and I think lenders would rather work with their borrowers in hardship at that point.
The current situation dictated that it needed a sweeping solution across the board to ensure there was no dramatic impact on borrowers’ mortgage payment history and it served that purpose. Arguably some customers may have used that as a provision rather than a solution.
However, those customers may have required that provision because they may have not been aware of future circumstances.
Advisers have a duty to make sure we inform our customers of exactly what the mortgage holiday entails with regards to total costs.
Overpayments could be taken into account and used as a buffer for payment holidays. Interest-only could be another potential solution or a review of the term, if there is an opportunity to extend it within the intended retirement age. But it will be difficult to make sweeping changes across the board.
Although, I understand that the focus of the lenders has been making sure productivity wasn’t hit before looking at other more creative solutions to support customers.
As we get to the new normality, they may change that focus and look at things on a case by case basis.
Mortgage holidays had been received as a positive move initially. However, in the wake of the inevitable economic downturn to follow post–lockdown, many may forget that putting off paying today will mean repaying plus interest in the near future.
In these circumstances, means testing could add real value, ensuring mortgage holidays benefit those who really need it and who have genuinely been hit by financial hardship.
This also allows lenders to continue offering assistance to keep borrowers in their homes in the long term.
The pandemic has highlighted just how little many people have in savings and an emergency fund and has served as a wake-up call to many funding an unsustainable, ‘keep up with the Jones’ lifestyle.
Our clients are telling us more can and should be done. We also believe the industry has a wider social responsibility to consider.
The government could do more to close the gap between the wholesale borrowing rate at 0.1 per cent to those eye watering annual percentage rates offered by loan companies and credit card providers.
To do this CEOs will need to convince shareholders that helping borrowers through the difficult times ahead is more important than a simple number on their balance sheets.
Until then, our industry and the professional broker’s role will continue to be providing the best advice to clients as well as advocating for more transparency to ensure all consumers are treated fairly.
Inevitably a significant number of borrowers will still be facing financial challenges after the three month mortgage holiday.
Means-testing might sound like a sensible idea but I doubt lenders will have the capacity to handle the administration it would entail.
And it would likely cause delay and some very difficult judgement calls to be made – some of which would inevitably seem harsh.
As such means-testing doesn’t seem like a practical feature of an extended payment holiday scheme.
For a significant number of borrowers we’ve spoken to at Mortgage Medics, while the payment holiday is welcome, they didn’t necessarily need to have their entire monthly payment waived, because they still have money coming in, just less of it.
I think many borrowers would jump at the chance to keep making some sort of contribution to their mortgage, such as servicing the interest.
Allowing temporary conversions to interest–only would reduce the amount by which borrowers would see their payments increase after any concessionary period.
A more sophisticated option might offer borrowers the option to choose their temporary monthly payment, at somewhere between zero and 100 per cent of their regular payment, but lender resources and system limitations would probably make this difficult in practice.
We haven’t had any clients ask for anything other than a payment holiday, but as an industry I think it’s our job to continue to innovate in terms of the support than can be offered to borrowers.
I hope that we can include interest–only as an option for borrowers whose financial challenges extend beyond the three-month payment holiday.