In March, as the magnitude of Covid-19’s impact on household finances was dawning on the UK government, mortgage lenders agreed to offer payment holidays of up to three months to any borrower who asked for one. Since then, industry body UK Finance calculates more than 2 million such deferrals have been granted, equivalent to one in six outstanding home loans.
Though a moratorium on possessions is currently in force, this protection is due to end on 31 October – the same day as a deadline for applications for mortgage payment holidays linked to the pandemic.
In around 70 per cent of cases where payment deferrals have ended, full payments are estimated to have resumed. But for many thousands of borrowers, as well as their lenders, the resumption of so-called normal credit reporting arrangements presents a fresh lurch into the unknown. Though a further extension of the deferral scheme has not been ruled out, it is neither in the interests of borrowers nor lenders to continue to provide this support indefinitely.
This week, the Financial Conduct Authority (FCA) proposed new guidelines for mortgage providers, urging them to provide “tailored” forbearance measures to assist any borrowers who are still struggling after the temporary support ends.
The watchdog said lenders should avoid "a ‘one size fits all’ approach”, but instead “use a range of different short or long-term forbearance options as appropriate”, including term extensions, further payment deferrals, new interest rate structures, or switches from standard to interest-only mortgages.
UK Finance – which speaks for major mortgage providers including Natwest Group (NWG), HSBC (HSBA), and Barclays (BARC) – said the industry understands a tailored approach to forbearance “will likely be more suitable” for borrowers who continue to be affected by the pandemic. But the trade body highlighted the return to normal credit reporting as a necessary step for lenders to improve their understanding of borrowers’ financial circumstances and “reduce the risk of unaffordable lending”.
How this affects banks’ accounting treatment of their mortgage books – including further possible impairments – is not yet clear. Up until now, payment deferrals have been made available to borrowers based on requests rather than their individual financial circumstances. As such, the Bank of England has said deferrals have “not necessarily [been] good indicators of significant increases in credit risk”.
But following the FCA’s guidance, Threadneedle Street has told banks that some instances of tailored support will amount to credit impairments. “While in some cases the position will be clear-cut, in other cases a judgment will need to be made,” it said in a memo to lenders. The job of determining what financial difficulty is not in some way related to Covid-19 is arguably becoming more complicated, too.
“The FCA is making the point to the public, but the last thing we want is for lenders in forbearance mode to become overzealous,” says Andy Golding, chief executive of buy-to-let lender OneSavings Bank (OSB). “We should continue as a community to be as supportive as possible for our borrowers.” OSB, which has factored a national house price fall of 15 per cent and a spike in unemployment to 8 per cent this year into its forecasts, had granted payment holidays to around 26,000 accounts at the end of June, equal to 28 per cent of its loans and advances by value.
However, the timing of the deferral scheme and banks’ reporting obligations makes it difficult to build a full picture of major lenders’ exposure. Lloyds Banking Group (LLOY), the UK’s largest single residential mortgage lender, said it had granted some 472,000 holidays at the time of its interim results at the end of July. Of that figure, 193,000 holidays had matured, with 72 per cent now repaying, 23 per cent on new deferrals and 5 per cent having missed payments.
