The credit situation for a significant number of borrowers is going to change as a result of Covid-19, the lockdown and the financial decisions they have made.
David Jones is director of Click2Check
It seems fairly undeniable that over the course of the next six to 12 months, the credit situation for a significant number of borrowers is going to change as a result of Covid-19, the lockdown and the financial decisions they have made.
Look at the recent analysis of the current mortgage market by S&P Global Ratings and you might gain some understanding of what the worst-case scenario could be for UK mortgage holders.
S&P estimate that ‘between 55% and 90% of residential mortgage borrowers have resumed their mortgage payments depending on their credit profile’, which might lead you to suggest that is a big difference and quite a large ‘margin of error’.
But it does give you an understanding of where the fault line might lie in the future in terms of which borrowers may continue to take holidays, and which might also need another level of support when the current guidance around holidays finishes on 31 October.
At that point, we could still have between 10% and 45% of those borrowers, who have taken holidays, still not having paid anything back, and if they are unable to begin paying again they will need further lender support, which the FCA has recently made clear will appear on their credit files.
Up until now, specific missed payments, as long as they have been sanctioned by the lender or for other financial commitments by the other providers, have theoretically not been appearing on credit reports. Anecdotally, there have been suggestions that this has not been a fool-proof plan and missed payments have been turning up.
However, even if this is not the case and holidays are not working their way onto reports, we already know, and advisers will know this better than anyone, that lenders have been taking all the financials into account when making lending decisions, regardless of whether they appear on the credit report or not.
A quick look at the borrower’s banking data will show if they have stopped making payments, and when, or if, they have started them up again. We might say that it is a responsible lenders’ duty to take this into account anyway, even if the missed payments are not showing on a credit report.
What happens next is perhaps of most interest, because it seems obvious that more borrowers will need holidays or further support, plus there could be a wave of other arrears and missed payments due to the overall impact of lockdown, the end of furloughing, potential unemployment, and any other hits to the finances.
These problems may be even more acute for those borrowers who have had previous arrears. Again, S&P estimates that 10.7% of borrowers on a payment holiday have had previous arrears, although only 1.7% of all loans are both on payment holidays and arrears’.
There has to be however, a greater likelihood that we will see a new swathe of borrowers who have picked up arrears on other payments in 2020 and have also needed to take a mortgage holiday.
It will not need me to point out the complexity of this picture, and it is one that advisers will need to work through if they are going to get a positive outcome for the client.
However, with many borrowers going through a particularly traumatic period financially, it is also understandable if they are not completely au fait with their current situation, how their credit report looks and what that means to their borrowing capability going forward.
Advisers have to handle such situations sensitively, but they also need full disclosure from the client before even getting to work on a solution.
Having that data upfront, via a product such as Credit Assess, means they can work from a position of strength and set out a realistic picture of finances and what is achievable, rather than one the client might have on their head based on their pre-lockdown situation.
It is a tricky path to peddle but it is one that advisers, armed with the right tech, are more than capable of dealing with.