Covid-19: What the mortgage holiday’s scary Halloween end means for contractors

The rather scary prospect of a very black economic spell will be hanging over contractors, home-owners and aspiring home-owners on Saturday October 31st – Halloween. Ominously, the cauldron's already bubbling with the following nasty ingredients that we know about, writes John Yerou, the founder of Freelancer Financials, a mortgage specialist for contractors.

• Mortgage payment holiday comes to an end (on the exact day, the 31st)
• Credit files will update to reflect mortgage arrears;
• Repossessions can commence;
• Furlough scheme -- the CJRS -- ends (on the exact day; the 31st);
• Job losses expected to follow;
• Brexit deal (with ‘contractor-friendly’ clauses) looking less likely with EU.

The upshot is that the UK is staring a recession in the face, despite the lifting of the coronavirus lockdown seeing a return of consumer spending to almost pre-pandemic levels. Generally-speaking, economists and our internal bean-counters see things getting worse before they get better. But actually no matter who's quoting from the tealeaves, the truth is -- nobody has a clue how long the economic malaise will last. So, what are the facts?

Figures and dates we know

Government measures in response to the coronavirus pandemic (currently) end on Halloween. You couldn’t make it up. The scariest day of the year where we all dress up to give each other a fright is this year going to mark the starting pistol for us all to receive some potentially really horrific news. The biggest flies in the ointment appear to be the CJRS closing and, closer to the type of powers which we wield, the end of the UK’s mortgage payment holidays.

Nearly 2 million homeowners have taken this 3-month break from their mortgage. That equates to one in seven mortgagees in the UK. Despite pleas for borrowers to take independent and professional advice before making a decision, most unfortunately didn't.

The result was that many people chose to take a mortgage holiday without speaking to a mortgage adviser. With the CJRS going the way of the witchcraft this Halloween, such householders could find themselves facing the final nail in the coffin if they are one or more incomes down when the widely-predicted recession bites.

Why payment holidays were a bad idea (for some)

From our perspective, we urged ContractorUK readers and other contractors online and via social media to think twice before opting for a home loan holiday. Internally, we responded to all our clients who contacted us wanting to take a payment holiday to ask the simple question, "Do you absolutely need to?"

On reviewing their situation, many clients decided against the payment holiday. On reflection, they didn’t want to risk it affecting their ability to borrow later. The holiday’s winding up this Halloween, to a hard deadline, didn’t ease their fears. But even dabbling in the mortgage holiday initiative may come back to haunt some individuals.

The issue is that yes, the government gave reassurances that payment holidays would not leave a blackmark on a borrower’s credit files. But there are still impish little footmarks there for lenders to see!

What contractor mortgage lenders are asking

Going further and actually having taken a holiday, this break from wanting to pay back your home loan can, and already is affecting people's ability to borrow. Right now, but also very likely in the future too. We know this because lenders want to know:

• whether you took a payment holiday,
• why you took one, and
• do you still work in the industry that necessitated the break.

This last question is making the hair on some people’s necks stand up!  But it is the question of the moment, as lenders are shifting from enquiring “How much do you earn?” to “What industry do you work in?”

What next for homeowners in the mire?

But if this is all making the walls close in, and that’s even before we’re even in the month of Halloween, be reassured that there is a bite of white magic on the horizon. The Financial Conduct Authority has issued “guidance” to lenders for when the holiday is over to help customers still bogged down in repayment difficulties. It’s not a firm template but nonetheless, the FCA’s advice is that lenders ought to offer struggling homeowners alternatives, depending on their specific situation. This could include:

• extending the repayment term to reduce the monthly repayments,
• temporarily converting to interest only, or
• restructuring the loan.

So lenders should not take a one-size-fits-all approach in their provision of further help to customers affected by the pandemic, once the holiday is over. They specifically ask lenders to offer a range of “tailored” solutions, both long and short-term.

Got the mortgage holiday blues? You might well still be catered for

And, according to the FCA’s interim chief executive Chris Woodward, lenders must also be pro-active. In particular, Woodward said last week:

“We are proposing that firms contact their borrowers in good time before the end of a payment holiday, and work with them to come up with a tailored plan to help get them back on track”.

Under the new guidance, the FCA has instructed lenders to prioritise this tailored support for mortgage borrowers most at risk. Also though, they must offer money guidance or referrals to debt advice services for those in dire straits.

But beware the Danaans bearing gifts! The FCA has told lenders that, where it's clear borrowers can't afford their loans, they must resolve to deal with those debts ‘moving forward.’ 

That move forward could see many homeowners realise their worst nightmare. In some cases, it may mean selling property and downsizing. Or renting to avoid accruing mortgage arrears. 

But there is a mortifying fact we daren't overlook -- banks have a legal responsibility to protect their shareholders! That may seem like an other-worldly concern given what's happening, but it's nonetheless true.

So yes, lenders can take guidance from the government and FCA. But they’re also independent financial institutions, in business to turn a profit. And after they were made the horsemen of the 2007/8 financial apocalypse, it's unlikely they'll wait to be hung out to dry again.

What if I’m a limited company contractor who knows I’m going to struggle to meet repayments?

If you took a payment holiday and find yourself unlikely to be able to resume your mortgage payments from November 1st 2020, don't hang about. The problem brought on by the Halloween deadline won't shrink away like a vampire before a crucifix. This is damnably real.

In fact, if you’re a contractor staring at eye of newt or similar for your meals post the 31st, it’s imperative you contact your lender in good time – well before the deadline. If you stake your claim first, the lender may look kindlier on you for it.

If you’ve used a mortgage broker in the past, strongly consider contacting them for advice first and again, do so well before Hallows’ Eve. Don’t think that just because you’ve successfully gone the 'limited company route' before, your lender will automatically let you again.

It’s also worth going forward to the lender with time on your side because they are changing their lending criteria and lowest deposits on a daily basis. Lenders were already looking at the way they address contractors working through PSCs because of changes to IR35 in the private sector. Covid-19 has only emphasised how precarious some markets are.

Final considerations

Remember, as the nights draw in, brokers are there to help, not suck the lifeblood from your worldly remains! As always, the guidance outlined here is very much 'as of today'. None of the somewhat scary scenarios we’ve outlined above are set in stone. As we've seen this week, the government is not frightened of making last-minute U-turns. Both they and the FCA are monitoring the situation and adjusting their actions accordingly.

And our recommendation is for contractors to do exactly the same, especially if you are concerned about keeping the wolf from your door! So to make sure you stand a ghost of a chance of getting through this, and even though we’re a whole month adrift from October 31st, stay alert, chase down loose ends and keep your phone and inbox attuned to the slightest of movements. Being front-footed may just be enough to keep you ahead of the many who will be scrambling for financial safety on or after the 31st, and it may just be the difference between becoming a victim this Halloween and being able to breathe new life into your contractor finances.

Find out more about contractor mortgages or contact Freelancer Financials here.