It was always fairly obvious that COVID19 was going to have a significant financial impact on the UK (and, indeed, the world). What may not have been obvious, however, was just how that impact was going to manifest itself. For example, the after-effects of COVID19 are acting as a barrier to re-mortgaging. Here’s what you need to know.
Financial help carries a price tag
The government introduced a raft of support measures to help people cope with the impact of COVID19. These included emergency loans (not grants) to businesses, the furlough scheme and grants for the self-employed. The government also worked with various parts of industry to create breathing space for those impacted by COVID19.
For example, it worked with lenders to implement what were effectively self-certified payment holidays. In other words, borrowers were simply allowed to tell their lenders that they had been impacted by COVID19 and hence needed special arrangements. They did not have to go through the usual process of lender scrutiny and approval.
These measures were not, however, entirely “no strings attached”. To begin with, payment holidays simply meant that the borrower did not have to make their usual repayment. Lenders, however, were permitted to keep on adding interest to the debts. This meant that payment holidays could actually leave people owing more, in the case of high-interest debts, a lot more.
In addition to the direct, financial impact, payment holidays had the potential to damage credit records. Even if, technically, they weren’t reported, there was still the possibility that lenders would figure it out all the same. For example, if the balance of a loan was going up instead of down, then it was fairly likely that the borrower was on a payment holiday.
COVID19 and the mortgage market
On the one hand, the mortgage market has arguably adapted to COVID19 impressively well. Banking itself went online years ago. Mortgage products, however, were still largely dependent on analogue processes like surveying and conveyancing. The industry has, however, pulled together to keep the mortgage market running.
On the other hand, the damage COVID19 has caused to people’s finances can make it very difficult for them to get new mortgages, even if they’re already homeowners. Since the Mortgage Market Review, lenders have been obligated to scrutinize a potential borrower’s financial situation. They can only lend if they are confident that a borrower can afford the loan.
People impacted by COVID19 may have seen their credit ratings going down, their debt levels going up and/or their employment situation becoming more precarious. Finalizing Brexit at the same time may have made life even more challenging for some people.
In short, COVID19 may have created a new group of “mortgage prisoners”. It is unclear just how big this group might be because some people might not bother even trying to remortgage. If they believe they’re almost certainly going to be turned down, they might just bide their time and wait for better days.
Finding a solution
The state of the mortgage market could end up being a tricky dilemma for the government. On the one hand, they are likely to be well aware of the dangers of encouraging lenders to relax their standards. On the other hand, they will presumably want to avoid voter backlash at the next election.
One possible way to square this circle in the mortgage market would be for the government to include remortgagers in the new Help-to-Buy mortgage guarantee scheme. This might also help people who were mortgage prisoners before COVID19.
On a broader note, the government may need to work with industry to provide longer-term help to people whose finances have been disrupted by COVID19. This could ultimately benefit the economy as a whole and the mortgage market in particular.
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Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up repayments on your mortgage