Have mortgage payment holidays eased the pain or simply prolonged it?

Some 2.75 million mortgage payment holidays were granted up until the end of 2020. With the scheme extended to July 2021, the question to ask is, have the banks got it right?

The decision to defer mortgage payments may seem a gift for customers who have found themselves financially constrained due to the Covid-19 pandemic. But such a decision is perhaps not always the best one, as mortgage debt continues to accrue interest during any holiday period. Furthermore, has there been sufficient ‘means testing’ to ensure that holidays are only offered to those who really need them? If the answer is no, then all we are achieving is an accumulation of debt and a slower journey back to personal solvency.

Of course, for some, there simply has been no other choice than to defer payments. If we take psychologist Abraham Maslow’s hierarchy of needs, the minimum people need to survive are food, clothing, warmth, shelter, for example, and households that have lost significant proportions of income have doubtless relied on a mortgage payment holiday to meet those needs. For others, however, the need to defer has perhaps been less acute, and more about convenience or easing the financial burden. Would such customers have been better off paying a reduced amount? After all, the current financial crisis may be one of several in a customer’s lifetime, and, as we all know, paying off a mortgage can take a chunk of lifetime to achieve. Putting off the inevitable is always a risk given things can always get worse. So, perhaps the better question to ask is, have customers been educated effectively about taking a mortgage payment holiday? Financial Conduct Authority guidelines aren’t clear on this.

The day of repayment is nigh

August 2021 will be upon us in no time, and by then all customers who have opted for a mortgage payment holiday will be expected to recommence payment. Unfortunately, as the scheme does not extend the term of the mortgage, monthly payments will be higher. Unless customers have overcome their financial challenges, and indeed have additional disposable income to cover the additional monthly cost, then they will be in worse shape than ever. The pain may have been eased temporarily, but it will return with greater vengeance.

Realistically, where will we be in August in terms of economic recovery? The jury is still out on this, and different sectors of the economy, industry and government do not all share the same outlook. What is certain is that we will not be back to pre-Covid-19 levels. The Office for Budget Responsibility (OBR) has forecast that the UK’s unemployment rate will reach 6.8% in 2021, a rise of 2.4 % from 2020. Whilst this will be biased towards the younger population (one of the groups worst affected by the pandemic), who are less likely to have a mortgage, this still places many individuals in a potentially very harmful position.

Educate and empathise

Many people have accumulated savings over the past year thanks to social restrictions, but this does not detract from the flip side of the coin that there is a huge proportion of the nation that has amassed greater debt. To avoid greater inequality where the rich get richer, the poor get poorer, and perhaps decades of struggle are inflicted upon millions of people, our banking institutions must recognise this dichotomy and take decisive action to educate and empathise with their customers across the board:

• Educate: From product design, offer, onboarding and throughout the lifecycle of the mortgage relationship, banks must epitomise clarity and provide comprehensive information on the benefits, risks, in-life options and alternatives to customers.

• Empathise: Identification of true vulnerability will be more important than ever, and unless banks are comfortable for the home re-possession rate to rise, or for customers to fall further into debt through other and higher cost borrowing, they must prioritise and address this.

Across Capita, we have helped many world-class banks and other lending institutions to build the optimum framework and responsibly manage the mortgage customer lifecycle. With our extensive experience of business process and operations management supported by appropriate digital technology and software, we can help you achieve parity and profitability, supporting the UK mortgage customer, whilst protecting the integrity of your brand.