Payment holidays may hurt mortgage application chances via the back door
New information uncovered by MoneySavingExpert.com indicates taking a payment holiday on your mortgage or other forms of credit could have an impact on future credit applications despite promises that credit scores won't be affected.
When you have an agreed mortgage holiday in place, your credit file isn't affected as you are making the agreed payments (ie, nothing), so there's no negative impact on your credit file.
But many new lenders don't just rely on credit files and application forms to assess creditworthiness. They can use Open Banking and a range of other methods to assess people's finances, and these can indicate that no payments are temporarily being made – thus allowing lenders to see that person is on, or has taken, a payment holiday.
After a tip-off to MSE founder Martin Lewis that some lenders may be looking to use these methods to factor in mortgage and other payment holidays when assessing credit applications, he put this scenario to the financial regulator.
Martin specifically asked whether a lender was allowed to factor in a payment holiday to an acceptance decision, if the lender had found out about it through their usual checks.
The Financial Conduct Authority (FCA) confirmed that lenders could, saying: "In practice, lenders may use sources other than credit files, such as bank account information, to take account of other factors in their lending decisions. These factors could include changes to income and expenditure, and also any increased indebtedness as a result of interest accruing during the payment holiday."
See our Coronavirus Finance & Bills Help guide for help on payment holidays, who they're suitable for, and how to apply.
Martin: 'We wait to see how substantial the impact will be – but those who need a mortgage holiday should still do it'
Martin Lewis, founder of MoneySavingExpert.com, said: "The FCA has confirmed, sadly, that while credit files shouldn't be impacted by mortgage or other payment holidays, lenders are still allowed to take them into account when making their acceptance decisions.
"It's impossible to say yet how widespread this will be or how substantial the impact will be – we'll start to learn that over the next year. Each lender's assessment process is different, it's a dark art that's hidden from the public and never published, so this is likely to be yet another factor applicants will need to navigate.
"Certainly many new challenger financial firms talk about their new, more sophisticated customer assessment models, that they believe are better than just relying on credit files. It's that very fact that sparked me to look at this in the first place. And as they will be able to see that someone has temporarily not paid their mortgage, they can spot payment holidays.
"My hope is that as these holidays are specifically for the short-term financial hit of coronavirus – and as the practice is so widespread – it won't be used by many firms, and where it is it won't tarnish individuals' credit reputation for too long. But there's no real way to know.
"Most importantly, I don't believe this should stop anyone who needs a mortgage holiday from getting one – if it's crucial for cash flow, just do it. Yet for those on the border, who may find it temporarily useful but can cope without it, add this to the fact that interest racks up during the payment holiday and I'd err on the side of caution."
How do mortgage holidays work?
Back in March, banks and building societies agreed with the Chancellor to offer 'forbearance' to mortgage customers who are struggling to keep up with bills due to the effects of the coronavirus pandemic – including the option of taking a three-month 'holiday' where customers don't have to make mortgage payments.
By the end of April, figures showed that 1.6 million customers had taken mortgage holidays since the beginning of the crisis – that's one in seven of all UK mortgages.
Mortgage holidays MUST be agreed with your lender – if you just stop paying without making a formal agreement, this will count as a late payment and put you into arrears. But an official mortgage holiday won't affect your creditworthiness.
It's also worth nothing that if you take a mortgage holiday you WILL still be charged interest for the time you're not making payments – which is another reason to think carefully about whether you really need one.
But you won't have to pay it back immediately, as it'll be added on to the total cost of your mortgage and factored in to repayments when you start making them again. Depending on your bank, you'll generally pay slightly higher monthly payments in future to spread the cost, or increase your mortgage term by the length of the holiday – we've a breakdown of lender-by-lender policies in our full guide.
You can also get three-month payment holidays on products such as loans and credit cards, buy-now-pay-later agreements and car finance – though again, interest will continue to accrue during the holiday. One-month interest-free holidays are also available for payday loans. Again, there's full info in our Coronavirus Bills & Finance Help guide.
Will mortgage lenders use payment holiday information?
Different lenders use different methods for deciding who to offer mortgages and credit to, using information from your application as well as from credit files, bank statements and Open Banking data (if you've agreed to this).
How information about payment holidays could be used will vary from lender to lender, and all decisions will be made in relation to the customer's individual circumstances.
When we checked with several major mortgage lenders, most of them indicated to MSE that payment holidays could be factored in when assessing applications.
For example, Bank of Scotland, Halifax and Lloyds said that decisions would be made based on a full understanding of customers' circumstances and affordability, and that changes of circumstance due to coronavirus would be considered. NatWest and RBS said that a range of factors would be considered, but stressed that taking out a mortgage holiday due to coronavirus would not in itself prevent someone being approved for a new mortgage.
Not all lenders will necessarily use this information though. Barclays, for example, says a payment holiday with another lender won't have any impact on the likelihood of being accepted for a new mortgage with it.
Even if it is taken into account by the lender, it will be one of a range of factors used when assessing your application – so it's impossible to say how much of an impact it will have.
What does the FCA say?
An FCA spokesperson said: "Credit files are an important tool, along with other checks, for making sure that credit is affordable. To minimise the impact of the coronavirus crisis, we have made sure that there is no negative impact on the credit file of consumers who have been granted a payment deferral. Credit files will show that consumers have been up to date with mortgage payments for the duration of the payment holiday.
"Lending is a commercial decision for firms based on their own credit risk appetite and the lending criteria which they choose to set. This means that in practice, lenders may use sources other than credit files, such as bank account information, to take account of other factors in their lending decisions. These factors could include changes to income and expenditure, and also any increased indebtedness as a result of interest accruing during the payment holiday."