How will taking a mortgage payment holiday impact my credit file?

As the UK braced itself for the second national lockdown on 5th November, the UK Government again asked lenders to grant payment holidays to mortgage borrowers who requested them.

The Government enforced this through the regulator of UK financial services, the Financial Conduct Authority (FCA), with instructions that borrowers could have up to 6 months of mortgage payment deferrals as a result of Covid-19 related financial pressures.

During the first lockdown, 1.9 million mortgage payment deferrals took place. It is estimated that a similar number of deferrals will happen again from November through to the end of January next year, which is the new deadline to apply.

But what impact will this have on the individual credit files of borrowers who are looking to exercise the option?

Part of the FCA rules for lenders relating to these payment breaks is that no missed payments can be registered on the customer’s credit file, as long as the reason cited for financial distress is the coronavirus. It has been left to individual lenders as to how much delving they do into individual circumstances, but based on recent experience, lenders have simply been taking the borrower’s word for any hardship caused by the coronavirus. This has given comfort to millions of mortgage-holders who have been adversely impacted by the financial impact of the pandemic and are worried about keeping up with mortgage payments.

Missed mortgage payments that are logged with the major credit referencing agencies have a disastrous impact on the ability to obtain competitive mortgage rates in the future. This could obviously compound financial issues already felt by households due to the economic uncertainty.

However, despite the protection afforded to borrowers’ credit files by the FCA, lenders can easily use more subtle back-door methods to deny credit to borrowers legitimately using payment deferrals.

For example, by running a simple credit check on application for a new mortgage, lenders can see mortgage balances that haven’t reduced for consecutive months, making it obvious that a payment deferral option has been taken up. Although this in itself is today unlikely to lead to an outright decline for a mortgage, it could do in the future as lenders get more cautious in their lending decisions.

One of UK’s largest building societies has also informally mentioned that they could insert new questions into their mortgage applications about whether mortgage payment holidays have been taken due to financial pressure. This would be a more upfront way of only lending to those who are deemed impeccable in their mortgage track record.

In summary then, although a mortgage payment holiday will not have a directly negative impact on your credit report, it isn’t entirely invisible to lenders if they decide to look and take action.

It’s likely that lenders will only use historic payment holidays against borrowers if there is too much demand for borrowing, and they become very picky about who they lend to. The issue here is, as we rapidly approach a climate where lenders may be forced to be careful about who they lend to, it’s more important than ever to ensure your credit file remains intact. Although mortgage payment holidays will not damage the credit file, they should only be taken if there is a real danger of missing mortgage payments due to financial pressures.

If you have already exercised the option to defer your mortgage payments, and are concerned about which lenders you should approach for your new mortgage, Smartr Finance can advise on the best course of action based upon your unique needs.