Borrowers face ‘lender lottery’ as 323,000 payment freezes end soon

Hundreds of thousands of people still on breaks from their mortgages and unsecured debts face a potential ‘lender lottery’ from next month as blanket protections are removed.

Banking body UK Finance said financially vulnerable people benefiting from 323,700 payment holidays across mortgages, credit cards and personal loans will be offered help ‘tailored to their individual circumstances’.

Those whose finances were impacted by the coronavirus pandemic were initially offered payment holidays of up to six months in April and fee-free overdrafts of up to £500, but these measures will end on 31 October.

Borrowers were allowed to freeze their credit card and other payments in April for up to 6 months, although they still racked up interest on their borrowing

The potential cliff-edge at the end of this month comes at same time the Government’s original furlough scheme is due to end and as Britain braces for a potential surge in unemployment.

Sara Williams, a debt advisor who runs the website Debt Camel, said ‘quite a few people’ still in need of help faced ‘a double whammy’, with payment holidays and the furlough scheme coming to an end at the same time.

Under the measures announced today by UK Finance, those with home loans could be allowed to extend the length of their term, switch to interest-only payments, obtain further payment breaks or add any interest incurred over the course of a holiday to the total amount they owe.

Will the new measures hit your credit score?  

Borrowers whose payment holidays did not show up on their credit report as a missed payment could see their score hit from the start of next month if they have to turn to their lender for further support.

James Jones, head of consumer affairs at the reference agency Experian, confirmed new payment deferrals would be visible on credit reports. This is Money has previously reported that banks are turning down borrowers who have taken a mortgage holiday, even if it is not supposed to affect your credit score.

From November, where borrowers temporarily pause or reduce their regular payments lenders will flag this on their credit report, and detail how long it will last for. 

Lenders will report any monthly payments received based on the original payment. For example, if someone agreed to pay half their original payment for four months, they would emerge from this two payments in arrears, which would be reflected on their credit report.

Jones said: ‘While it’s vital that customers continue to get all the help they need from their lenders, it’s also important that credit reports reflect the facts. Banks and lenders use this information to make judgments about what credit customers can afford and how likely they are to repay it – meaning accurate credit reports are essential to support responsible lending.’

Meanwhile those with unsecured debts like credit cards and personal loans could apply to pay a lower amount each month for a short period of time, agree a longer-term repayment plan if they are in greater financial difficulty, or consider refinancing their outstanding debts. 

This leaves those coming to the end of their payment breaks at the mercy of individual lenders. 

One man who spoke to This is Money from Southend-on-Sea has to negotiate payment suspensions with five credit card providers and two personal loan providers on a monthly basis until December after his payment holidays came to an end at the start of this month.

Robert – who asked for his name to be changed – had previously lost his job in February as a result of the impact of the pandemic on Asia and southern Europe.

A lot of people will find it scary to tell a lender they can’t make the normal payments, but most non-priority lenders should be helpful and freeze interest and not add charges if you can’t afford to pay them. 

Sara Williams, Debt Camel

He received just a month of severance pay having only been employed for three months, was ineligible for the furlough scheme and was on Job Seekers’ Allowance for six months.

He currently has a conditional offer for a job, but said he ‘would worry if I had no positive change in circumstances’, saying the letters he had received from his creditors had been ‘quite cold’ and that he wasn’t sure anyone would actually read them.

He said he would have to consider debt solutions like an Individual Voluntary Arrangement come December if he could not find a job.

Debt charities the Money Advice Trust and StepChange broadly welcomed the proposals but said there would need to be co-ordination between multiple creditors to avoid a ‘lender lottery’ and a ‘joined-up approach’ between lenders, regulators and the Government to support those in financial difficulty. 

Williams urged those in trouble to speak to their lender or a debt adviser as soon as possible. 

She said: ‘A lot of people will find it scary to tell a lender they can’t make the normal payments, but most non-priority lenders should be helpful and freeze interest and not add charges if you can’t afford to pay them.

‘If you talk to a debt adviser first, they can help you work out a budget to show lenders, including how much you can offer to each lender.’

Andrew Hagger, the founder of the personal finance site Moneycomms, added: ‘Lenders will need to take a more tailored approach to offer solutions that work best for each individual borrower, a broad brush approach isn’t the answer.’

Robert told This is Money his creditors had acted more responsibly than when he had previously faced financial trouble 12 years ago, which he said was ‘one positive’.

Hundreds of thousands are still on payment holidays 

How many holidays? 

According to the latest figures from UK Finance, as of 9 October there were:

– 162,000 mortgage holidays in place

– 97,300 credit card holidays in place

– 64,400 personal loan holidays in place 

Although UK Finance’s figures revealed only 7 per cent of all payment breaks granted to borrowers since April were still in effect as of 9 October, it is likely those still on holidays are those who are in the most perilous financial situation.

And while UK Finance said over 75 per cent of the customers who had finished around 4.1million payment holidays had begun making repayments again, Williams said that meant ‘quite a lot of people were not’.

Lloyds Banking Group, which also runs Bank of Scotland and Halifax, said in its half year results in July that customers who extended payment holidays for a further three months ‘are typically of a lower credit quality and tend to have higher average balances and lower credit scores than customers who have never taken a payment holiday.’

Britain’s biggest banks will start to reveal how many of their individual customers were still deferring payments at the end of September when they release their third-quarter results from Friday.

UK Finance’s figures also do not include the number of payment holidays granted to car finance borrowers, which along with mortgages are classed as a ‘priority’ debt and must be repaid first ahead of any credit cards, personal loans or other debts.

Customers who have sought to extend their payment holiday are typically of a lower credit quality and tend to have higher average balances and lower credit scores than customers who have never taken a payment holiday.

Andrew Hagger said that while there were fewer people on payment deferrals than he had expected, ‘there are obviously many people still facing extreme financial hardship due to reduced income or unemployment.’

Surveys from the Office for National Statistics have suggested that household finances are increasingly under strain as a result of the coronavirus. 

On 9 October it found 29 per cent were using savings to cover living costs, 25 per cent were unable to save as usual and nearly one in five were borrowing or using credit to cover their costs.

Meanwhile, a third of people earlier this month said they would be unable to pay an unexpected bill of £850. This is up from 26 per cent in mid-June and is at a level last seen during the height of the national lockdown in mid-April.

The ONS found close to a fifth of people were finding it difficult or very difficult to pay bills since the pandemic struck the UK, compared to just 8 per cent beforehand.

Are household finances being put under strain from the coronavirus? 
Week % reporting reduced income due to the coronavirus % using savings to cover living costs% unable to save as usual % borrowing or using credit to make ends meet
12 – 16 August59%18% 25% 15% 
16 – 20 September 65% 29% 29% 19%
30 September – 4 October 63% 29% 25% 18% 
Source: Office for National Statistics 

Separate research from the regulator the Financial Conduct Authority warned 31 per cent of adults had seen their income hit, with household income falling by a quarter on average.

And the outlook is not encouraging. Unemployment stood at 1.5million, or 4.5 per cent, at the end of August, while the 227,000 redundancies made during the three months between June and August marked the most seen since the aftermath of the financial crisis 11 years’ ago.

Earlier this week Bank of England policymaker Gertjan Vlieghe predicted job losses would be worse than feared, and not all the 2million people currently still furloughed would have jobs to go back to.

The number of redundancies between June and August hit an 11-year high as the economic impact of the coronavirus continued to ripple through Britain's jobs market

The number of redundancies between June and August hit an 11-year high as the economic impact of the coronavirus continued to ripple through Britain’s jobs market 

When asked if the FCA and the banks could have offered more to those still in trouble, Williams said: ‘I don’t know. Lenders and regulators can’t carry on giving payment deferrals permanently.’

But Gareth Shaw, head of money at consumer group Which?, said the regulator ‘has wound down vital protections like payment deferrals too soon, and banks could now be overwhelmed by a huge number of customers that will be applying for urgent financial assistance in the next few months.’

UK Finance’s Eric Leenders said those able to do so should make payments on their mortgage, loan or credit card, but that anyone in financial difficulty ‘should get in touch as early as possible to discuss the options available, starting by checking their lender’s website which will be updated with the latest information.’