What to do if you cannot pay your mortgage due to the Covid-19 outbreak

As the Covid-19 outbreak continues, the financial strain of reduced working hours, living on statutory sick pay and redundancy will start impacting many consumers across the country. The Government has already announced a range of measures to help consumers, with promises of more to follow, including mortgage repayment holidays for up to three months, but is this the best option for homeowners and how will it work?

Although many banks had already announced that they would allow mortgage borrowers repayment holidays to help ease the financial pressure caused by the Covid-19 outbreak, yesterday the Government’s announcement made this a policy for all mortgage lenders. However, what is unclear is who will be eligible for mortgage holidays. As such, homeowners who believe that they could find it difficult to meet mortgage repayments should contact their mortgage lender as early as possible to discuss their options and not automatically assume that they will be allowed payment holidays unless it is part of the terms and conditions of their mortgage contract. In addition to this, some smaller building societies might not have the facilities available to enable mortgage payment holidays, for example Ipswich Building Society announced in a tweet today that this is not a facility they are normally able to offer.

For homeowners who are unable to take a mortgage repayment holiday or for who it might not be the most suitable approach, there are a number of other options available. An initial step mortgage borrowers can consider is agreeing to pay a lower repayment amount with their lender. This will reduce the monthly mortgage repayment for a short-time period to give the borrower the time needed to get to a better financial position, however borrowers should be aware that this will likely result in higher mortgage repayments or extend the existing mortgage term once they go back to making their standard repayments.

Another option for consumers is to lengthen the term of their mortgage. Doing this will spread the mortgage costs over a longer period of time, which will reduce the monthly repayments. Homeowners considering this should be aware that it will also likely result in the overall repayment costs being higher than if the mortgage was kept on a shorter term. In addition to this, older homeowners should also be mindful that if they extend their mortgage term, it could result in them still needing to make mortgage repayments after retirement.

Some banks and building societies might suggest that homeowners switch to an interest-only mortgage until their financial situation improves. An interest-only mortgage will likely substantially reduce the monthly mortgage repayments and is a common way for those in financial difficulty to manage their mortgage repayments, but it does mean that repayments on the loan are not being made. This means that homeowners will not be increasing the equity they own in their home and could result in higher mortgage repayments when they move back onto a repayment mortgage.

While there are drawbacks to all these options, it is important for homeowners to be aware that there are a number of options available to them if they cannot make their mortgage repayments. What is essential is that homeowners do not miss a mortgage repayment and instead contact their mortgage lender early to discuss the options available. As Eleanor Williams, finance expert at Moneyfactscompare.co.uk, said: “It will be vital for borrowers who are concerned about being able to continue making their regular mortgage payments to communicate with their provider as quickly as possible. This way they can discuss what options may be open to them and work together.

“It could also be prudent to speak to a qualified financial adviser to ensure that any alternative routes forward, and the potential implications of those, in the long-term are understood fully.

"Borrowers must ensure they are aware of the impact any decisions; for example, if their provider agrees to offer a mortgage payment holiday, those payments will ultimately still need to be made. It will also be important to confirm how the lender will report these agreed payment holidays to the credit reference agencies to make sure that these are not registered incorrectly, which may have an adverse effect on their credit rating. Overall, it is important to make certain that they understand what it will mean for their mortgage payments, term, or balance in the future and can make an educated decision as to what will be the best way forwards for their circumstances.”

The Building Societies Association has announced today that building society lenders are offering customers who are up to date with their mortgage payments and who are impacted by the Covid-19 outbreak the ability to self-certify if they need help. Lenders are waiving the standard practice of assessing the customer’s finances and considering what forbearance options may be the most suitable to help make the process as straightforward as possible during this stressful time. At the moment, not all lenders will be able to offer mortgage holidays, while banks will have a different application process, so homeowners should contact their mortgage lender as early as possible to discuss their options and the application process.