Overstretched Borrowers More Likely to Use Mortgage Holidays


September 2020

Overstretched Borrowers More Likely to Use Mortgage Holidays

Overstretched borrowers are more likely to seek relief from their monthly payments with loan holidays, new analysis has shown.

Nearly 18% of those with a 95% loan-to-value (LTV) mortgages have sought payment holidays during the coronavirus crisis, research from financial services firm Hargreaves Lansdown has shown.

In comparison, just 6% of those who borrowed 25% of their property’s value have sought relief.

Borrowers with high LTV mortgages and small deposits have to pay off more principal and face higher interest rates, both leading to higher monthly payments.

Homeowners who borrowed many times their salary are also more likely to request mortgage holidays. Around 17% of those who borrowed five to six times their income have deferred payments, compared to less than 6% of those who borrowed just one times their annual earnings.

Sarah Coles, personal finance analyst at Hargreaves Lansdown, said: “The bigger percentage of the property value that people have borrowed, the more likely they are to have been forced to take a payment holiday. Similarly, the larger multiple of salary they’ve used, the higher their chances of needing to take a break.”

She also pointed out that homeowners with high LTV mortgages and high income multiples are more likely to be young and that young people are more likely to have been furloughed during the crisis.

While mortgage holidays may have given these homeowners immediate reprieve from their payments, the relief could be costly in the long-term.

“If they need to roll up the unpaid amount and add it to the total outstanding at the end of the mortgage holiday, it will eat into their capital. If they only have a tiny amount of equity to start with, they could fall into negative equity. If house prices then drop, they could end up having borrowed significantly more than their property is worth,” Coles said.

The findings appear to justify recent decisions made by lenders to tighten affordability criteria, requiring higher deposits and higher incomes for mortgages.

Lenders have withdrawn nearly all highly leveraged mortgages during the pandemic, amid worries that financially-strapped borrowers won’t be able to afford the repayments and that a tumble in house prices could leave them in negative equity.

Banks and building societies yanked more than 1,000 low-deposit mortgage deals during the last six months. There are now only 79 90%, 95% and 100% mortgages on the market, compared to the 1,184 deals that were available in March before the pandemic roiled the housing market and economy, Moneyfacts found.

HSBC was one of the last holdouts offering 90% LTV value mortgages. Now, amid a glut of applications, the bank has restricted those loans to customers remortgaging to a different rate. Other borrowers will need at least a 15% deposit.

Meanwhile, Barclays and NatWest have recently slashed the income multipliers for mortgages. 

Barclays quietly lowered its maximum income multiples from 5.5 to 4.5, while NatWest cut the amount it will lend to self-employed from 4.9 times their income to 4.25.