Mortgage payment breaks

The Financial Conduct Authority (FCA) previously confirmed that homeowners whose income was affected by the coronavirus pandemic had until 31 July 2021 to apply for a payment break.[1] This deadline has been extended from 31 January 2021.

Borrowers were able to request an initial payment break of up to six months: three months' followed by a further three months' break where necessary.[2]

The payment break applied to:

• residential mortgages

• buy to let mortgages where the tenant cannot make payments because their ability to pay has been affected by coronavirus

Borrowers can request tailored support if they are still in financial difficulty after the deferral period. It is normally in the borrower's best interest to return to full payments if they are able to do so.

Some mortgages allow payment breaks. The borrower can ask to exercise their right to take a break in payments.

If the payment break is not allowed under the existing agreement, the lender can still allow it as one of their forbearance options. Borrowers should contact their lender to discuss their options. The lender may ask for more information, or evidence that the borrower's circumstances will improve.

If the borrower is already in arrears, the lender should come to an arrangement that minimises the risk of possession.

The Information Commissioner’s Office has information about how payments and defaults are reported to credit reference agencies.

Unpaid instalments are still due under the terms of the mortgage contract. An agreement by the lender to defer payments is not a variation of the contract. This is because there is no consideration from the borrower.

If the borrower had a payment break, the deferred monthly instalments were usually added to the mortgage balance using a process known as ‘capitalising’. This means:

• more interest is charged over the term of the loan

• the contractual monthly instalment is likely to increase when payments recommence

Lenders should provide personalised information to show how capitalising the deferred payments will impact on the monthly payments.

Alternatively, the lender may offer to extend the term of the mortgage to account for the missed payments.

If the lender grants a payment break and the mortgage is already subject to a suspended possession order, the order is breached if the contractual monthly instalment is not paid.[3]

Borrowers should discuss the implications of breaching the terms of the order with their lender and ask for confirmation that the order will not be enforced as a result of an agreed payment break. Borrowers can apply to court for a variation of the order to prevent enforcement once they are able to make the contractual payment again.

If a payment break is granted the contractual monthly payment element is likely to increase once payments recommence. Borrowers should consider whether they can make the increased payments. Lenders could extend the term of the loan instead of increasing the monthly payment where appropriate.