Reality set to hit home for thousands of borrowers

Since the world changed beyond all recognition in March 2020, more than nine million have made use of the furlough scheme, while an estimated 750,000 have lost their jobs. In an effort to ease the impact on these households, the Chancellor announced payment holidays for all those who would be struggling to meet their mortgage repayments due to the pandemic. More than two million UK consumers grasped this lifeline with both hands.

 

Now, 2020 is drawing to a close. As the traditional holiday season approaches, the end of the payment holiday period is also on the horizon. Borrowers who have yet to apply still have until the end of March 2021 to do so. However, the Financial Conduct Authority says it expects the majority of those homeowners who took advantage of the payment holiday option to resume making full repayments. On top of that, it has issued instructions to banks that they should pause to consider the “appropriateness” of offering continued support to consumers who continue to face financial difficulties. 

Increased pressure on homeowners

Those furloughed typically continued to receive 80 percent of their regular paid income, subject to a maximum of £2,500 per month. Given that the average mortgage payment equates to just under 30 percent of the borrower’s monthly income, the payment holiday facility made it possible for those affected by the pandemic to keep their heads above water. 

Inevitably, however, difficult decisions will have to be made over the first few months of 2021. We only need to switch on the TV or step out of our front doors to see that things are still a long way from the world as we knew it this time last year. 

Short-term borrowing to make up the shortfall in anticipation of a return to normality as we head into summer 2021 seems inevitable for many households. Here, a pattern observed in northern Europe might well start to appear in the UK. More people than ever are making use of payday loans in Sweden. The very phrase tends to have negative connotations to UK borrowers, but there are circumstances in which it can be the most practical solution to a short-term cash flow crisis. The problems only begin when this sort of borrowing is utilised without first forming a clear plan for repayment.

Guarding against more trouble ahead 

The payment holidays have been a life saver for many householders. Inevitably, there is frustration at the thought of these coming to an end while the economy continues to flounder and businesses operations are far from normal across so many sectors. However, for every month that the payment holidays persist, there is the prospect that we are setting ourselves up for escalating difficulties further down the line. 

Deferring repayments during mortgage holidays is fine, but that doesn’t stop interest from continuing to accumulate on the debt. The net result? For many borrowers, the longer the break goes on, the more their monthly repayments could rise when the holiday comes to an end. As financial consultant Conor Murphy told the Daily Express: “A vaccine won’t erase the past eight months and many borrowers will remain in a vulnerable situation following the pandemic.