Payment holidays may affect mortgage applications, research suggests

Taking a payment holiday on a mortgage or other forms of debt could potentially affect someone’s future applications to borrow money, research by MoneySavingExpert.com suggests.

This is despite promises that people’s credit scores should not be affected – as some firms may also use other sources of information about a potential borrower when making lending decisions.

Lenders have worked with the Financial Conduct Authority (FCA) to help people facing temporary financial pressures due to Covid-19 by offering payment freezes on credit cards, personal loans and mortgages of up to three months.

Interest will still build up during a payment holiday, unless the lender says otherwise, and the payments that have been skipped will still be part of the overall debt to be paid off after the holiday ends.

The FCA’s information about mortgage payment holidays for consumers on its website says: “Our guidance makes clear to firms that they should ensure that taking a payment holiday will not have a negative impact on your credit file.”

But MoneySavingExpert said the FCA had confirmed to it that, in practice, a lender could factor a payment holiday into an acceptance decision, because some lenders use a range of methods other than just credit scores to assess people’s finances.

The methods used when deciding who to offer mortgages and other forms of credit to can vary from lender to lender.

They may, for example, also consider bank statements and data from open banking technology – where a consumer agrees that information about them can be securely shared with a firm.

Martin Lewis, founder of MoneySavingExpert.com, said: “The FCA has confirmed, sadly, that while credit files shouldn’t be impacted by mortgage or other payment holidays, lenders are still allowed to take them into account when making their acceptance decisions.

“It’s impossible to say yet how widespread this will be or how substantial the impact will be – we’ll start to learn that over the next year. Each lender’s assessment process is different, it’s a dark art that’s hidden from the public and never published, so this is likely to be yet another factor applicants will need to navigate.

“Certainly many new challenger financial firms talk about their new, more sophisticated customer assessment models, that they believe are better than just relying on credit files. It’s that very fact that sparked me to look at this in the first place. And as they will be able to see that someone has temporarily not paid their mortgage, they can spot payment holidays.

“My hope is that as these holidays are specifically for the short-term financial hit of coronavirus – and as the practice is so widespread – it won’t be used by many firms, and where it is it won’t tarnish individuals’ credit reputation for too long. But there’s no real way to know.”

Mr Lewis said the findings should not stop anyone who needs a mortgage payment holiday from getting one.

He said: “If it’s crucial for cash flow, just do it. Yet for those on the border, who may find it temporarily useful but can cope without it, add this to the fact that interest racks up during the payment holiday and I’d err on the side of caution.”

The FCA was quoted on MoneySavingExpert.com’s website as saying: “In practice, lenders may use sources other than credit files, such as bank account information, to take account of other factors in their lending decisions. These factors could include changes to income and expenditure, and also any increased indebtedness as a result of interest accruing during the payment holiday.”

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