As the easing of lockdown apparoaches, Britain’s mortgage borrowers will re-emerge from their homes with differing circumstances.
Whilst some, dubbed lockdown savers, have financially benefited and saved during the pandemic, others have been compelled to use mortgage holidays.
Some of the former set of borrowers have been paying off large chunks of their mortgages, while the latter households are feared to be more vulnerable to default and repossession.
Across all households, 38 per cent of adults have seen a negative financial impact from Covid-19 – more than twice as many as those who have experienced a positive impact, according to the FCA’s recent Financial Lives survey.
At one end of the spectrum, lockdown savings have fuelled record lump sum mortgage repayments, according to research by the Equity Release Council.
At the other end, close to 800,000 homeowners could be at risk of losing their home, according to a separate study by the Social Market Foundation.
‘Mortgage holders across the nation have been polarised by the experience of the pandemic,’ says Jim Boyd, chief executive of the Equity Release Council.
‘The unexpected gift of extra savings has helped some households to pay down mortgage debt.
‘At the same time, Covid relief measures have been vital to help hard-hit families manage the immediate impact of lost income.’
The lockdown savers paying down their mortgages
Mortgage lump sum overpayments reached £5.1 billion in the final quarter of 2020 – an 18 per cent rise year-on-year – surpassing the previous quarterly high of £4.9 billion recorded in 2007.
This has probably been helped by the extra savings accrued by many households during the pandemic.
With travel restrictions imposed to contain Covid-19 and household spending limited by the shut-down of retail, leisure, hospitality and tourism, many homeowners are better off now than they were prior to the arrival of Covid-19.
The latest Bank of England figures revealed that families have squirrelled away more than £150 billion over the past year. The phenomenon was also mentioned in last week’s Budget document, which noted that ‘overall household balance sheets have strengthened’.
The Budget referenced the extra saving done by households up to the third quarter of 2020: Bank of England figures running beyind this show higher savings of £150bn more
The problem for savers is that as pots have grown, rates on savings accounts have headed south. Base rate was slashed to a new record low of 0.1 per cent to fight the coronavirus crisis and stimulate the lockdown economy and savings deals have seen rates tumble.
In light of that, for homeowners who have built up a bigger savings pot over lockdown, paying down their mortgage via lump sum payments might seem a wise option.
A lump sum overpayment is an extra payment made on top of usual monthly mortgage commitments, which will enable borrowers to pay off their mortgage faster and save on overall interest.
The majority of mortgage deals allow borrowers to make overpayments amounting to at least 10 per cent of the total outstanding amount each year without incurring early repayment charges.
Some are more flexible still, but others may be more restrictive so borrowers should always check before making overpayments.
‘Most lenders will adjust your monthly payments a month after your lump sum repayment, but others may still work on an annual basis, which means your monthly payments may not be adjusted until the next calendar year,’ says Andrew Montlake, managing director at Coreco Mortgage Brokers.
‘But it is always a good idea to repay your debts as quickly as possible, as the longer you have a debt, the more interest you pay – but you should also consider whether you’ll need that additional cash in the short to medium term, as once paid into a mortgage, it can be hard to draw that money back if needed.’
An alternative option is to change to an offset mortgage, which allows people to use a savings or current account to offset against their home loan debt – only paying interest on the balance.
That means there is less interest to pay and if monthly payments are kept the same, the mortgage is cleared faster.
Savings can be withdrawn if needed.
‘This has the advantage of enabling you to get the benefit of offsetting your savings against the mortgage interest whilst still being able to use your savings if needed,’ says Montlake.
The UK’s total mortgage debt rose to a new high of almost £1.5 trillion by the end of 2020, having seen a rise of £44 billion in the last year alone.
There are 130,000 households who remain on mortgage holidays as they attempt to navigate themselves through the pandemic.
The other side of the coin: The struggling at risk
Lockdown hasn’t been a benefit to all households and not everyone has had financial help from the government.
Many businesses have been closed, or seen takings plummet, unemployment has risen and some of the self-employed are locked out of The Chancellor’s help scheme.
Some 770,000 mortgage holders are estimated to be at risk of repossession, according to research by the Social Market Foundation,
More than one in ten homeowners do not have enough savings to cover a single month’s mortgage payments, it said.
Those on lower incomes were more likely to report declining savings, with 46 per cent of mortgage-holders on incomes up to £20,000 saying they had seen their savings decline
Over one quarter of those impacted work in retail or manufacturing – sectors badly hit by the pandemic
Some 14 per cent of the 2,000 mortgage holders surveyed said they did not have sufficient savings to cover even one mortgage payment and 30 per cent said their savings would fail to cover two months of mortgage payments.
Over one quarter of those impacted work in retail or manufacturing – sectors badly hit by the pandemic.
‘It’s often observed that the pandemic public health restrictions have allowed many people to pocket extra savings,’ said Scott Corfe, research director at the Social Market Foundation.
‘But our analysis shows this isn’t true for everyone and close to 800,000 homeowners could be at risk of losing their home during these turbulent economic times.’
‘The Government needs to prepare for a possible spike in evictions and repossessions, with many of society’s most vulnerable unable to keep paying their mortgage if they suffer a loss of income or lose their job.’
Mortgage holidays have resulted in borrowers facing more interest over the life of the loan
The 130,000 still on mortgage holidays
Despite overpayments soaring, regular mortgage repayments remain below pre-pandemic levels as some mortgage holders continue to defer payments in the face of financial pressures, according to Bank of England figures.
There are 130,000 households who remain on mortgage holidays, according to the latest statistics from UK Finance, with the payment deferral scheme having been extended until 31 July.
Some 2.5 million people are estimated to have taken out a mortgage holiday since the start of the first lockdown.
Those still considering taking one have until 31 March to apply for a full or partial payment break. But experts advise that borrowers should only consider doing so if they really need the support.
‘Let’s start by getting one thing straight: the mortgage payment “holiday” scheme is not a holiday – it is a deferral scheme,’ says Montlake.
‘Whilst you do not pay anything for three to six months, what happens is that the amount of interest you don’t pay does not disappear but is added back onto the loan amount.’
‘This means your mortgage amount will increase slightly and you will continue to attract interest on the whole amount.’
‘This has resulted in many borrowers now facing higher monthly payments after the three or six-month deferral period, which in turn leads to more interest being paid over the life of the loan.’
It is not a holiday – it is a deferral scheme
There are also some concerns about whether taking a payment holiday will in any way negate your ability secure a new mortgage in the future.
‘Mortgage holidays do not impact on a person’s credit file and overall credit score,’ says Henry Jordan, head of mortgages at Nationwide Building Society.
‘Lenders are allowed, however, to use them to ask extra questions and perform extra checks on borrowers.’
If you are due to remortgage, then it would be best to try and refrain from deferring payments now.
‘Anyone looking to remortgage whilst on a repayment holiday would find it difficult to do so.’ warns Montlake.
‘Those who have come out of the payment holiday and are now fully up to date with their deferred payments should not have an issue, although questions may well be asked by some lenders.’
‘It makes sense to talk to a professional adviser about your upcoming remortgage to find out your exact situation and the full range of options available to you.’
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