Mortgage lenders have also been urged to clarify whether borrowers who take a payment break will see a damaging impact on their credit scores.
Rishi Sunak announced yesterday that borrowers who fall into financial difficulty because of the covid-19 outbreak will be able to defer their payments for three months.
UK Finance says that lenders have different approaches and that arrears may be reported to credit reference agencies, but that firms will make efforts to ensure that forbearance offered under these circumstances does not have a damaging effect on a customer’s credit score
Lloyds Banking Group, Royal Bank of Scotland/ Natwest and Nationwide Building Society have all confirmed that deferred repayments due to coronavirus will not be treated as arrears and other lenders have been asked to follow suit.
Credit reference agency Experian says it would expect lenders to record missed payments during agreed deferment periods with a “U” code, which it says would prevent damage to borrowers’ credit scores.
But brokers warn the situation is far from clear and raise concerns that borrowers may struggle to remortgage in the future if they cannot show a clear run of 12 successful repayments in a row, as many lenders require.
Advisers say it is also vital that borrowers understand they must speak to their lender and agree a payment break rather than just stopping direct debits without warning.
Mortgage advisers called on lenders to provide absolute reassurance that those who take the chancellor up on his promise will not be later penalised by their scoring models.
Impact Specialist Finance managing director Dale Jannels says: “If a ‘U’ is put on the client’s credit report, we tend to find lenders want further information and proof of the last 12 mortgage payments.
“A holiday normally shows as one missed payment.
“As yet, no one has confirmed to me that, if a computer system only picks up nine mortgage payments and then three holiday payments (as a U), they will not take it as three unpaid payments and thus fail many lenders’ credit requirements.
“Mainly as they cannot confirm the last 12 mortgage payments were made successfully/on time.
“Forget credit scores, we are looking at the lenders’ requirement to prove the last 12 mortgage payments.
“I suspect this could be a large problem when they come to re-mortgage, especially if within the next 24-36 months.”
Altura Mortgage Finance managing director Rob Gill says: “Lenders should absolutely reassure borrowers that any payment holiday taken due to coronavirus will not be treated as arrears.
“Anyone seeking such assistance is clearly worried about their financial situation and keeping a roof over their head, they shouldn’t have also have to worry about how it might affect their credit record.”
Chapelgate Private Finance associate director Colin Payne says: “I wholeheartedly agree that any borrower who is up-to-date with their mortgage payments now and requesting a payment holiday for up to three months should be reassured by lenders that it will not be reported as late or non-payment to credit agencies.
“Lenders may need to change their reporting systems to ensure that this doesn’t happen as the impact could be devastating to a borrower in the event they wish to take a further mortgage in the short to medium term or if they wanted to move home.
Payne adds: “It’s also worth bearing in mind that a payment holiday may not be the most appropriate course of action as interest will accrue on any payments not made over the remaining term of the loan.
“Where a borrower can make some payment, a lender may agree an interest-only concession for mortgages that are repaid on a capital and repayment interest basis in order to reduce the monthly payment or accept, say 50 per cent payments over a longer period than three months.”
A spokeswoman for Experian says: “During a payment holiday the account should not be recorded as having any form of detrimental arrears.
“It is down to each organisation to decide how and if they wish to allow any forbearance and at what stage.
“Should a lender agree to offer forbearance or a payment holiday to a borrower, we would expect a lender to report a status code ‘U’.
“This would not have a negative impact on a consumer’s credit score.”
