How did lockdown affect mortgages?
The coronavirus lockdown affected mortgages in several different ways.
- Mortgage approvals fell – social distancing rules meant lenders were unable to carry out physical valuations of properties. This has meant mortgage approvals fell.
- Lenders tightened their lending criteria – many lenders have increased the deposits they require for their mortgages.
- Some lenders pulled mortgage deals from the market because of the uncertainty, reducing the number of options for customers shopping around.
- Mortgage holidays boomed – more than 1.6m homeowners took a break from repaying their mortgage due to the impact on their income.
- Interest rates fell – with the Bank of England cutting the base rate to 0.1% mortgage interest rates have fallen.
What is a mortgage payment holiday?
A mortgage repayment holiday is when your lender allows you to stop making repayments on your mortgage for a few months. The coronavirus crisis has resulted in one in seven mortgage holders in the UK arranging a mortgage payment holiday.
You can’t simply stop paying your mortgage, you have to get approval from your lender first. By doing that you avoid being charged late payment penalties and damaging your credit rating. Late or missed mortgage repayments are marked on your credit report and stay there for six years. They will damage your credit score as it shows lenders you are unreliable when it comes to repaying your debts. Avoid this by making sure your lender has approved a mortgage repayment holiday before you stop paying.
A mortgage repayment holiday isn’t free. While you aren’t making repayments, your lender is still adding interest to what you owe. This means when you start paying again either your monthly repayments will rise to pay off the extra interest you owe, or it will take you longer to clear your debt.
You can find out more with our guide to payment holidays.
I’m self-employed – can I still get a mortgage holiday?
The fact you are self-employed shouldn’t affect your ability to get a mortgage holiday during the coronavirus crisis. Lenders have fast track approval processes in place to deal with the huge volume of applications for mortgage holidays.
This means you shouldn’t need to provide evidence or have an affordability test. You just need to tell your lender you need a mortgage payment holiday because you are experiencing financial difficulties due to coronavirus.
Find out more about self-employed mortgages.
Will taking a mortgage repayment holiday affect my credit rating?
Your credit rating should not be affected by a mortgage repayment holiday. The Financial Conduct Authority (FCA) has told lenders that these temporary measures during coronavirus should not impact credit reports and scores.
In practice, an agreed payment holiday should not appear on your credit report. If your payments were up to date before you took the holiday, they should still appear up to date on your credit report. If you were behind on your mortgage payments already then that will show on your credit report, but it shouldn’t get any worse while you are taking a mortgage repayment holiday.
A mortgage payment holiday will not result in new missed payments appearing on your credit report and impacting your credit score.
If you have taken a mortgage payment holiday it is a good idea to check your credit report to make sure it hasn’t affected your credit score. If you find that your credit report has been wrongly updated, alert your lender immediately. It should be able to quickly set the record straight.
How has coronavirus affected mortgage interest rates?
As a result of the coronavirus pandemic the Bank of England has slashed the base rate to a record low of 0.1%.
This interest rate reduction has been passed on to homeowners by mortgage lenders with lower interest mortgage deals on offer. However, the impact of coronavirus on the UK economy has also meant that banks and building societies are being very cautious with their lending. This means hundreds of mortgage deals have been pulled from the market.
For example, in March before the UK went into lockdown there were 5,222 mortgage products on the market. By the end of May this had halved to 2,566.
What do interest rate drops mean for my mortgage?
If you have a variable rate mortgage or tracker mortgage the interest rate you are paying may have dropped to reflect the cuts to the Bank of England base rate. This means your monthly repayments may have fallen
Anyone on a fixed-rate mortgage won’t have seen any change to their mortgage repayments as your interest rate is set at a certain level and doesn’t follow movements in the base rate. However, if your deal is close to ending you could enjoy some savings when you remortgage.
Is it a good time to remortgage?
There has been a record-breaking fall in interest rates on fixed-rate mortgages meaning you could make savings by remortgaging now.
However, if you have a high loan-to-value (LTV) on your home you may find your choices limited. Lenders have pulled a lot of their high LTV mortgages from the market. The number of two-year and five-year fixed rate mortgages for people with only a 5% deposit (95%LTV) has dropped from close to 300 before the coronavirus crisis to around 20.
If I’ve been furloughed can I still get a mortgage?
Employees who have been furloughed should still be able to get a mortgage but how much you can borrow may have been affected.
When you apply for a mortgage your lender uses your income to calculate how much they are willing to lend to you. Typically, they lend around four and a half times your income. So, if you earn £30,000 a year you could borrow around £135,000. However, if you have been furloughed and you are only receiving 80% of your normal income this will affect these calculations and reduce the maximum amount you can borrow. In this example, it could mean your maximum mortgage amount falls to around £108,000.
If you apply for a mortgage while furloughed the lender may also ask for a letter from your employer to confirm you will still have a job when furlough ends.