One in nine households get payment holiday but concern grows for their future credit rating

British lenders have granted mortgage repayment holidays to more than 1.2m borrowers as part of relief measures for households affected by the Covid-19 outbreak.

It means that about one in nine households will have their mortgage payments and interest deferred for up to three months to help cope with loss of income during the crisis.

However, the figures prompted a warning that some of these people may find themselves being turned down for future mortgage borrowing on the grounds that they are effectively announcing they are in financial difficulty.

The figures cover approvals granted over the three weeks from 17 March, when Rishi Sunak, the chancellor, announced that UK banks would be granting payment holidays.

The banking industry group UK Finance, which released the figures on Tuesday, said the average mortgage holder was saving £775 in suspended capital and interest payments each month, although the payments would be recovered by the lenders.

Stephen Jones, UK Finance’s chief executive, said: “Mortgage lenders have been working tirelessly to help homeowners get through this challenging period. The industry has pulled out all the stops in recent weeks to give an unprecedented number of customers a payment holiday, and we stand ready to help more over the coming months.”

The government, the Financial Conduct Authority and lenders have all made clear that taking a payment holiday will not affect an individual’s credit rating, and that remains the case.

The UK’s credit reference agencies such as Equifax and Experian hold the data that makes up someone’s credit score, but these bodies do not decide whether someone can obtain credit – that is up to individual lenders, who are ultimately free to decide who they wish to lend to.

A payment holiday may make a borrower less desirable in their eyes, and that means that in some cases, people’s future borrowing could be impacted. Mortgage broker Private Finance said: “If you require new finance in the next six months – in terms of a remortgage with a new lender, or going back to your existing lender regarding a new purchase - a repayment holiday will make your application less likely to be accepted.”

Chris Sykes, a consultant at the firm, added that, by requesting a payment holiday, “essentially you are announcing to your lender – and, potentially, other lenders who might see your bank statements in the future – that you are in financial difficulty. One lender has even told us that if a borrower has requested a payment holiday on an existing loan, any new cases will automatically be declined. Be warned that they won’t be alone.”

Other official relief efforts have been slower to take off. The government recently admitted that just 1.4% of businesses asking about the £330bn coronavirus business interruption loan scheme (CBILS) via UK banks had so far been successful.

Nearly three weeks after Sunak launched CBILS to help small and medium-sized businesses with loans and other financing of up to £5m apiece, it emerged that just 4,200 of the estimated 300,000 firms which had sought financial help ended up receiving rescue loans.

Paul Dales, the chief UK economist at the consultancy Capital Economics, said it was essential that the government got the money to businesses to avoid a worst-case economic downturn. “It does feel like businesses hold the key, and if the government and banks can keep businesses afloat then they have fighting chance. If not, then the costs of this crisis will linger for longer.”

Dales said the number of mortgage holiday approvals roughly reflected the one in 10 people whom he forecast would be unemployed due to the coronavirus outbreak over the coming months.

While many workers would be renters rather than homeowners, so not covered by the mortgage holiday data, Dales said: “It is better than nothing and might mean that actually the housing market remains a symptom of the crisis rather than a cause. But if businesses can’t get help in the short term, businesses will disappear, more households will be made unemployed, and then households can’t spend as much anyway.”

Mark Harris, chief executive of mortgage broker SPF Private Clients, said lenders should be applauded for enacting government policy within a relatively short period of time, adding that for many of those with income or employment issues, a payment holiday could be invaluable.

But he added: “Borrowers should remember this is not ‘free’ money. During the payment holiday, interest is added to the mortgage and will be owed afterwards.”

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