In 2020, millions of people suffered from a reduction in their income due to the COVID-19 pandemic and were left unable to make their monthly mortgage payments.
This led to a surge in the number of people asking their mortgage lender for a payment break (also known as a payment holiday) which is, essentially, a freeze on your monthly mortgage payments for a set period or until your financial situation improves.
The scheme promised some much-needed relief for homeowners on a reduced income without impacting their credit score or ability to borrow credit down the line. But, was it too good to be true?
In this blog, we’ll outline life after payment breaks in a cost of living crisis as the economy faces fresh problems and households brace for further financial hardship.
What is a payment break?
Between 20 March 2020 and 31 July 2021, mortgage providers provided payment breaks to millions of customers struggling to meet their monthly mortgage payments for up to three months at a time for a maximum of six months.
Put simply, it is an agreement between a borrower and a lender to pause monthly mortgage payments for a set period.
They existed before 2020 but gained attention when they were offered to homeowners struggling to make their monthly mortgage payments due to the financial impact of the COVID-19 pandemic.
However, with the cost of living crisis ramping up, are homeowners that took a payment break during the pandemic in a worse financial situation than people that didn’t?
It has led to higher monthly payments
When COVID-19 payment breaks were first introduced, some homeowners that had lost their job or been furloughed jumped at the chance to freeze their monthly mortgage payments for a set period.
But, when people’s payment breaks came to an end, they were asked to repay missed payments (often in the form of higher monthly payments) as well as added interest accrued during this time.
This has led to people paying more than they were in the first place which, in the midst of a cost of living crisis, has meant some households are not only still struggling to meet their monthly payments but will be at risk of falling deeper into debt when further price hikes come into force.
It has impacted loan applications
One of the main reasons why so many households agreed to pause their monthly mortgage payments during the pandemic was because they were reassured that doing so wouldn’t impact their credit report or lower their credit score.
But despite this, there have been reports of lenders incorrectly recording COVID-19 payment breaks on people’s credit reports and because this proves that they were unable to meet their monthly mortgage payments for a set period, it has led to some people being declined for a loan.
Furthermore, even if payment breaks taken during the pandemic don’t appear on your credit report, evidence that you’ve taken a payment break can appear in other places, such as your bank statement, and lenders will pick up on this when assessing your credibility for a loan.
In the midst of a cost of living crisis, this can have disastrous consequences for homeowners that are already on the brink of financial hardship.
It has led to higher interest fees
Whilst most people that took a payment break during the pandemic assumed it would put a stop to monthly payments for an agreed length of time, some people failed to realise that interest would still be charged during this time.
This is because, regardless of why you stopped making your monthly payments, interest fees will continue to be charged and this amount will increase the longer your payments are on pause.
However, with people that applied for a payment break unable to meet their monthly mortgage payments, most also weren’t in a position to keep paying interest and this led to them being slapped with a higher balance when their payment break came to an end.
It has led to further financial problems
With the cost of living crisis ramping up and further price rises expected, millions of homeowners are already struggling to keep up with everyday costs without missed mortgage payments and interest fees to worry about.
There has also been added pressure on mortgage lenders to reintroduce payment breaks during the cost of living crisis as rent and mortgage payments continue to be the biggest concern amongst low-income households.
But with payment breaks originally introduced as a short-term solution to a temporary drop in income as opposed to a long-term solution to a permanent change in financial circumstances, you must consider the impact taking a payment break could have on your finances before asking your mortgage lender to pause your payments.
