It will be decades until the full effects of the Covid pandemic, and our responses to it, are realised and understood.
But those who took loan or credit card payment holidays in the months after the unprecedented interventions to stop the spread are already counting the cost.
New data seen exclusively by The Independent suggests one in 10 mortgage applicants has been rejected after taking a loan repayment break, despite assurances that this wouldn’t be the case. At least not at first.
In May 2020, just two months after a raft of unprecedented emergency support measures were introduced, 1.5 million payment breaks on mortgages, loans, credit cards and other bills had been approved in a bid to support customers’ short-term finances.
At that time consumers were clearly told that, under the initial “payment deferral guidance” set out by financial regulator the Financial Conduct Authority (FCA), these Covid-related deferrals would not be included in credit reports and therefore wouldn’t affect customers’ credit ratings.
By November, 2.6 million deferrals had been issued on mortgages alone since the start of the pandemic, with a significant majority of people quickly returning to repaying in full at the end of their deferral period.
But by then the rules had changed in what the FCA describes as “the next step in the evolution of support for consumers”. Under this “tailored support guidance”, brought in at the end of July, any new deferrals could be referenced on credit files, a detail few applicants were aware of.
And now that underreported tweak to the rules is causing significant problems for those trying to move on with their personal and financial lives, the research from NerdWallet has revealed.
“The UK’s property market has bounced back strongly from the initial lockdown period, with house prices and transactional activity rising sharply,” warned John Ellmore, director of operations at NerdWallet.
“However, the pandemic and subsequent recession might have made mortgage applications more strenuous for prospective homebuyers as lenders tighten their criteria.
“This can be incredibly frustrating for mortgage applicants – especially when they are rejected for reasons that are largely beyond their control or simply unknown to them. Indeed, applicants who have taken advantage of loan repayment holidays as a consequence of the financial pressures caused by the pandemic may well find themselves unfairly targeted, given use of such schemes was not meant to impact on their ability to access credit in the future.
“Our research shows that the mortgage market can be difficult to navigate, underlining the importance of thorough research and preparation. Taking time to speak to multiple mortgage lenders and comparing different options online, for example, could save people time and effort when it comes to the actual application process, ensuring they do not pursue unrealistic or inappropriate options.”
In response to the findings, an FCA spokesperson said: “We expect lenders to treat customers fairly when they apply for a mortgage, including taking a range of information into account when making a lending decision. Our payment deferral guidance led to over 4 million payment deferrals being granted for mortgages, credit cards and personal loans, which supported families during the height of the pandemic.
“We made it clear to firms that when a borrower took a payment holiday under our payment deferral guidance, it shouldn’t be reported as missed payments on their credit file. This will have helped many customers to ensure that they are able to emerge from the pandemic and get back on track.
“Our guidance on tailored support makes it clear that where firms offer a range of support to customers, this should be reported to credit files in the usual way and that firms should be clear about the credit file implications of any forms of support offered to borrowers.”
Defending the decision to take payment deferrals into account despite the widespread confusion over guidance, banking and finance trade association UK Finance stated: “Under rules set out by the Financial Conduct Authority, lenders must carry out a thorough income and expenditure assessment for any new borrowing to ensure mortgages are affordable in the long term.
“Each lender will develop their own approach, depending on their risk appetite. This will consider a range of factors such as the type of borrower, their employment status, the sector they work in and the type of property they are looking to purchase, when deciding how much to lend.
“It would not be in the customer’s interest to lend more than they can reasonably afford.
“During a payment deferral period, the monthly payments that are not paid will not be reported to credit reference agencies as a worsening arrears.
“However, it is important to be aware that credit files are just one factor that providers use when making lending decisions.”
Mortgage providers will make “every effort” to ensure that if you take a payment deferral it does not negatively impact on your credit file, the association assured.
But if you apply for a new or additional loan later, a lender may ask you to declare any previous payment deferrals as part of its loan affordability assessment.
Payment deferrals under the Covid-19 scheme will not be recorded on your credit file as a missed payment.