When taken on face value, a mortgage holiday or forbearance seems like a lifesaver. However, this simple fix could have damaging consequences in the near and distant future.
When the coronavirus pandemic began taking over the world, it was soon revealed that this health crisis would drastically affect every aspect of an individual's life. As sections of the world went into lockdown, some things became untenable.
In order to help everyday people through the coronavirus pandemic, governments and banks worked together in order to offer financial-based support to affected individuals. This help came in the form of welfare payments and even something called a mortgage holiday.
During the peak of the pandemic, a mortgage holiday was introduced in order to help people. However, this holiday could end up being very costly for the nearly two million people who signed up for support.
What is a mortgage holiday?
Mortgage forbearance does not just apply in the US. Introduced in March in the UK, a mortgage holiday essentially allows people to defer payments without negatively impacting their credit rating - so it has been reported. However, this simple way to help people through the coronavirus pandemic is having unintended consequences.
Despite the promises that a mortgage holiday would only provide positive outcomes, those who embarked on this scheme are finding out the hard way that this may not be true. In fact, some people are now being declined when they apply for loans.
Lisa Orme, Managing Director of Keys Mortgages told the BBC that she has been warning borrowers not to take them unless they have no other option.
"We know, anecdotally, that people have used them to pay off credit cards, pay for holidays, pay for cars," she says. "I've been saying to people, despite all these promises about how it won't affect your credit file, I absolutely guarantee it will come back to bite you."
As such, the advice from the Financial Conduct Authority (FCA) is that while taking such a payment break may not affect credit scores, it could affect future lending decisions. This is because, when people ask to borrow money, lenders look at thousands of data samples.
The same article on the BBC explained that Matt Pollen was just about to launch his start-up and was trying to raise funding from investors when lockdown began. The launch had to be delayed, so he applied for a mortgage holiday as a security measure, in case the lockdown lasted a long time.
"The only advice I saw was the general advice from the government that it wouldn't affect any future credit history," he says.
But when Mr Pollen and his girlfriend tried to find out if they could take out a loan in the future to fund an extension, he was told he wouldn't be accepted.
"One of the first questions they asked was had we taken out a mortgage holiday - and when I said yes, they said a lot of the companies they work with aren't lending to people on them at the moment."
The effects of a mortgage holiday
On the surface, taking a break from paying a homeowner’s or business loan during a pandemic seems like a good thing. However, as the effects of the pandemic continue to deepen, a mortgage vacation could soon turn out to be an extended holiday.
Originally a three month vacation period, many people will now have to decide whether or not to extend this payment delay for a further three months. However, even a six or three months down period can have negative consequences.
Once banks look at an individuals’ payment history and spot a three-month gap, they are going to know exactly why that gap exists. This in turn tells the bank that this individual was having financial issues, making it virtually impossible for them to accept a loan application.” You could end up finding yourself in the unenviable position of looking for a bad credit mortgage.
While many financial institutions will recognize that these are unprecedented times, at the end of the day, a payment gap will suggest to lenders that the individual will be incapable of meeting any new loan repayments.
Keep in mind your financial history will be reported to the major credit agencies which in turn has a high probability of negatively impacting your credit history.
Borrowing money on a mortgage holiday
For those who are deemed to be on a mortgage holiday, Darren Robertson of Northern Virginia Home Pro explains “While also looking to secure a loan, all hope is not lost. Financial analysts suggest that the best course of action is waiting until normal payments resume before applying for a loan.
Further advice suggests that if people are able to resume their repayments before the ‘vacation’ ends, they should. It should also be noted that banks will not look unfavorably on these payment gaps once regular payment resumes.”
By being smart about a mortgage holiday, individuals can make use of things like loan repayment calculators in order to find the best ways to finance the purchase of things like cars and homes.
Applying for a mortgage forbearance
If you have done your research, read this article, and you’d still like to apply for a mortgage payment holiday, the first thing to do is contact your lender. Explain to them that you are experiencing financial difficulties as a result of COVID-19.
Currently, you don’t need to provide evidence or even undertake an affordability test. The decision of whether your application has been approved should, therefore, be relatively quick and straightforward.
Borrowing money during a pandemic
When the coronavirus pandemic hit, individuals were suddenly confronted with their entire income stream virtually vanishing in mere days. This isn’t the reality for the minority either, the majority of business and homeowners are facing the same prospect. Buying a home during the pandemic may not be the smartest idea if your employment could be in jeopardy or a reduction in pay is potentially on the horizon.
In an attempt to help struggling individuals, those affected could apply for a pause on loan repayments. However, an unforeseen consequence has seen these very people be negatively impacted by a mortgage holiday.
This pause on repayments has caused individuals to be rejected for other car or home loans. Highlighting how, even in the face of a pandemic, any financial assistance should be taken with the utmost care and caution. It’s always important to do your research before making any financial decisions.
Final Thoughts on Mortgage Forbearance
Taking a mortgage holiday through forbearance is something that should be considered carefully before making such a bold financial move. Hopefully, you now understand the pros and cons of doing so.
About the author: The above article on taking a mortgage holiday through forbearance was written by Sam Radbil. Sam is an author at ABODO Apartments, an online apartment marketplace that helps renters find apartments all across the country. ABODO reports on rent rates, the changing of real estate markets, and trends within the real estate industry.