Will mortgage payment holiday affect your credit score?

Mortgage market update regarding covid-19

Mortgage payment holiday (MPH) is available to both residential and buy-to-let mortgages.  However, some lenders for BTL mortgages will request evidence that covid-19 has affected the tenant’s income before allowing a payment holiday.  Check with lender for criteria.

Mortgage payment holiday will not affect your credit profile as long as the mortgage is currently not in arrears.  However, any deferred interest will be capitalised to the main loan and monthly payments adjusted after the holiday to reflect the new total loan.  Therefore our best advice is, if you can afford to pay the mortgage, pay it and not to take the payment holiday.

Current holiday period is to end in June.  But the holidays are to be extended for further three months to September by the FCA.  Application is a simple online process with most lenders.  Ban on mortgage repossessions have also been extended simultaneously.  

There will be no adverse mark on the credit file for this period, however, FCA has warned that lenders may take in to account overall financial status to assess lending on top of the credit file. 

Borrowers are “encouraged” to maintain mortgage payments if possible, whether fully, partly or converted to interest only.  

Affordability & Debt to Income Ratio

How much can I borrow?

Mortgage Guide Part 2
Affordability & Debt to income ratio

Maximum loan advance is based on the affordability of loan repayment.  As a general guidance to qualify for a mortgage, high street lenders prefer monthly loan and other fixed credit related payments to be less than 45% of the gross salary, i.e. income before tax and national insurance.  This is called the debt-to-income ratio (DTI).  

To calculate DTI, add up all obligatory fixed monthly outgoings for loans and credit, i.e. personal loans, higher purchase, credit cards & store cards (minimum 5% of balance even if zero payment currently), student loans, car loans, child support*, insurance* (life & building insurance), council tax*, new monthly mortgage and ground rent & service charges (flats only).  Then divide by monthly salary as a percentage.

DTI = Fixed monthly outgoing x 100%
           Gross monthly salary

[*Some lenders will exclude child support, insurance and council tax]

2b. Income multiples

Once you qualify based on DTI, the lender will apply income multiples to decide the maximum loan.  

Maximum loan is a usually a combination of DTI and credit score.  It can be specific to each lender. 

  • low DTI & good credit score: 4.75 – 5x income
  • low DTI + high income ( >£80,000 / year) + good credit score : 5.5x income.
  • high DTI : 4.5x income
  • low income e.g. up to £20k / year : 4 – 4.5x 
  • low credit score : up to 4x 
  • poor credit score : up to 3.5x 

The rate is important, but it should not be the only benchmark for selecting a lender.  

Other objectives that may be important to you needs to be considered. Therefore, the lender with the lowest rate may not always be the best.

Latest News

20/05: 90% LTV mortgages are trickling back in to the market for both purchases and remortgages.  Including for first time buyers.  

HMO lending still very limited.

 

19/05: Covid Restrictions. 

Due to the ongoing restrictions, many lenders have put physical valuations on hold.  Restrictions on back-log of properties are expected to start next wee, 

Picture 16

Housing White Paper 2017

Picture 16

Few days ago the Communities Secretary Sajid Javid announced a new set of policies in the Commons, which the government says will alleviate the housing crisis in the UK. The plans are aimed at both first time buyers as well as renters.

Some of the policies have been previously announce with some additional pledges to help renters and buyers.

Here are the main points.

Ban on letting agent fees for souring property for tenants.
A new Build to Rent Scheme aimed at institutional investors to build property, purpose build for renting with a guaranteed three year minimum tenancy.
Maintain Starter Home initiative introduced by the Cameron government.
Tackle unfair leasehold terms for house buyers (recently highlighted by the BBC).
“Use it or Loose it” policy on land owning developers with planning permission, where the development needs to take place within two years.
According to a spokesman for the Local Government Association, 9 out of 10 approved planning applications do not go on to being a new property. This is a case in many instances an investor adding value to a piece of land by obtaining planning permission before selling it on.

UK is supposed to require 200,000 new homes a year to keep up with demand. In London alone 50,000 household are in temporary accommodation.

Other highlights include.

-Every part of the country to have an up to date transparent housing policy allowing local communities to decide where development takes place.

-Maximise land for development from brown field sites, surplus public land and smaller sites in high density areas; with greater transparency on who owns land and planning permission granted

-Housing Infrastructure Fund of £2.3 billion.

-Another £3billion Home Building fund for small and medium size builders (announced previously) to build 25,000 new homes by 2020.

-Greater flexbility for local authorities to approve planning permission to improve speed and reliability and deny unnecessary appeals.

-Approval of newer construction methods to boost productivity compared to traditional builders.

-New rules making it easier to obtain planning to demolish offices and replace with residential homes on a like for like basis.

-Aim to reduce and prevent homelessness through advance support for those at risk.