The UK government announced that mortgage payment holidays are an option for a period of up to three months. This applies both to homeowners with residential mortgages and landlords with buy-to-let (BTL) mortgages, however, we are focusing on landlords BTL mortgages for this article.
What is a payment holiday?
A ‘payment holiday’ as defined by the FCA means “you agree with your lender that you will not have to make mortgage payments for a set amount of time. It is important to remember that you still owe the amounts that you do not pay as a result of the payment holiday. Interest will continue to be charged on the amount you owe.
This means that, at the end of the payment holiday, you will have to make up the missed payments. There will be various options for this, for example by increasing your monthly payments slightly, or by adding a short extension to your term. Your lender will be able to explain to you what options it offers.”
How to apply
Landlords should apply by contacting their lender. They will be asked to self-certify that their tenants’ income will be directly or indirectly affected by the current COVID-19 pandemic. The lender will not need to review or approve the application as this is a self-certification process. However, the lender can refuse to grant the mortgage payment holiday if they do not believe you are experiencing or reasonably expect to experience payment difficulties because of coronavirus. Lenders are approaching this situation in different ways so you will need to talk to your lender for their specific approach. Moreover, you should consider whether this is the right option for you before applying.
Ask yourself whether you need it
- Are your tenants paying rent as normal? If your tenants are financially secure and still able to pay the rent, is a payment holiday necessary?
- Do you have the cash reserves to cover a shortfall in the short-term? Landlords should have enough cash in reserve to tide them over for a few months of void periods.
- This is a temporary reprieve – your payments are not being written off. At the end of the payment holiday, you will need to make up the missed payments. Additionally, you will likely have increased interest to pay in the future as the FCA has confirmed that interest will still accrue during the holiday period unless your lender has told you otherwise.
Think about the potential impact on future borrowing
Taking a payment holiday should not have a negative impact on your credit payment history on your credit file, which the FCA has confirmed. However, lenders may take it into account when you approach them for future borrowing, so make sure taking up this option does not look opportunistic on your part and that it is something you really need. For example, underwriting teams may look on it negatively if:
- You request a payment holiday as soon as you can, rather than waiting to be sure you need it. They may see this as you trying to manipulate the system to save money or evidence of poor financial management.
- If you have outstanding loan applications with a lender, but you request a payment holiday, they may pause these other applications and want to investigate your cashflow and revisit your business plan. After all, how can you justify taking on another loan when you cannot service the existing debt? Or, the lender may reduce the amount they are prepared to lend you or decline to provide new finance.
- If you are applying for a BTL mortgage and you already have BTL mortgages with other lenders, then payment holidays will show up when the new lender requests information about the performance of your current portfolio. They may be wary of offering new borrowing if the landlord is already receiving a payment holiday from another lender.
Some landlords may be in genuine need of a payment holiday as their tenants have lost their jobs and can no longer pay rent, but this will not be the case for everyone. It might seem like there is no harm in applying for a payment holiday even if you do not really need one, but we encourage you to stop and consider the possible future implications of it first. If you do think you need a payment holiday, please speak with your lender and find out how they are approaching this option.