Covid-19 mortgage breaks: What’s the catch?

Keeping up with mortgage payments will be a priority for many households throughout this crisis. But with so many incomes plunging or ceasing completely, for tens of thousands of borrowers the sums in their bank accounts just aren’t stretching far enough to meet their overheads and cope with the unexpected change in circumstances.

If you are in this position, you are not alone. Almost 80,000 mortgage borrowers have availed of industry-wide Covid-19 payment breaks since they were first announced on March 18th, according to the latest update from the Banking & Payments Federation Ireland (BPFI).

That number is likely to swell further over the next month in light of a new deadline, set by the European Banking Authority, which is telling lenders that the deadline for processing and granting payment breaks to customers is June 30th.

Some banks, including Bank of Ireland and AIB, say borrowers must apply by this date if they think they need a break from repayments as a result of a Covid-19 hit to their incomes. But the BPFI's advice is that borrowers should contact their lender "as early as possible" to give it "sufficient time to process your application" before June 30th.

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Lenders are also keen that borrowers engage with them as soon as they experience difficulties, rather than becoming deadline-focused.

“Customers in financial difficulty will always have the best possible outcome by actively engaging with their bank,” says KBC Bank.

No payments are being waived here. As BPFI chief executive Brian Hayes has stressed, it is "simply a payment break". And whichever option borrowers choose, taking a break will add to the lifetime cost of their mortgage. You will pay back more over the full term than if you would have done if you had never taken the break – unless you find yourself in a position to make overpayments at a later date.

Who can apply

The payment break options announced by lenders in March are specifically aimed at borrowers whose incomes deteriorated as a result of Covid-19 and the abrupt, dramatic shutdown of the economy that took place to contain its spread. In the case of joint borrowers, this temporary loss of income may have been suffered by one or both parties to the mortgage.

Bank of Ireland also allows for “precautionary requests” in which the loss of income might not have taken place by the time of the application, but the applicants confirm that they “require a safety net”.

The temporary payment breaks are not designed for borrowers who were already having trouble meeting their repayments prior to the outbreak of Covid-19.

Permanent TSB, for instance, says its Covid-19 breaks are open to anyone meeting the normal repayment terms of their mortgage and anyone who is meeting the terms of a loan restructuring agreement that was agreed as a result of previous financial challenges, not those who are in unauthorised arrears.

For borrowers struggling to meet their repayments for reasons other than Covid-19, the initial advice is the same: contact your lender and don’t ignore the problem. But thereafter the process will likely involve more questions and more documentation.

When mortgage repayment difficulties are down to issues other than Covid, borrowers are typically asked to fill out a form called a Standard Financial Statement. This requires them to detail their monthly household expenditure on everything from utility bills to food, transport, medical and social expenses.

It then also asks borrowers to outline the steps they propose to take to reduce their monthly expenditure and the savings they expect to achieve.

In recognition of the extraordinary, fast-moving circumstances, Covid-19 payment break customers are unlikely be asked to complete such a form upfront. However, lenders may ask for some documentary evidence of a Covid-19 impact on your finances, such as a letter from an employer notifying you of a loss of income.

For the payment break to be processed and approved before the next scheduled payment date, borrowers are advised to apply as far in advance as they can: some lenders specify at least seven days’ notice, while Permanent TSB suggests allowing at least 10 – and that’s working days.

Accepting a Covid-19 payment break on a mortgage will not be regarded as a missed payment on the Central Credit Register and will not affect Irish Credit Bureau credit records, the Central Bank confirmed in March. If borrowers temporarily halt their repayments as a result of a virus-related hit to their income, their credit record won't be blemished – as long as the non-payment is part of a payment break officially agreed with the lender.

Types of break

Mortgage breaks were initially made available for three months, but at the end of April, the BPFI agreed to extend the period of deferral to six months if customers needed more time to get things back on track. In doing so, the industry here was following the example set by other European countries in response to the crisis.

Borrowers who were approved for a three-month break may want to extend this for a further three months. If this is you, your lender should be in touch to inform you of the option to extend or resume payments.

One key decision borrowers will have to make while applying is whether to ask for a complete moratorium on payments or choose to avail of the interest-only option offered by lenders. Picking interest-only would mean continuing to make some payment each month and, depending on how far you are into your mortgage term, it may be a much more manageable sum.

At AIB, the majority of mortgage customers to date have sought a full moratorium, a spokesman says. But where customers cannot meet their full capital and interest repayments, yet can make some payments, availing of the interest-only payment option will reduce the overall interest cost over the life of their mortgage compared to the full moratorium.

Before going ahead with a payment break, you should be given an indication of what your repayments will be when they resume after three months, or perhaps six. Some lenders also have calculators on their websites that allow people mulling a break to estimate the impact on their repayment figure after the payment break.

Repayment impact

One of the illustrative examples offered by Permanent TSB takes a borrower paying a rate of 4.5 per cent interest on a mortgage balance of €250,000, with a 20-year term remaining. Before taking a break, the borrower is paying €1,581 a month. But after making no repayments for just three months, the recalculated monthly repayment at the end of that period will be €1,611, or €30.98 more.

And the total repayable amount over the lifetime of the mortgage will increase by €2,453.47.

In this example from AIB, the difference between a complete moratorium and interest-only can be seen. A borrower with a mortgage balance of €100,000 and 15 years left to run on their loan, which has an interest rate of 3.15 per cent, has a monthly payment of €697.42. They then take a complete break after three months, at the end of which the monthly repayments are recalculated to be €712.24, or €14.82 more a month.

The total additional interest repayable over the remaining term, if no other interventions are made, will be €532.

But if the borrower is able to make an interest-only payment of €261.81 a month for those three months, their full monthly repayments once they resume clocks in at €706.68, going up by €9.26 a month, with the total extra interest repayable rising by a more modest €332.

A painful rise in monthly repayments at the end of the break may be reduced if the lender agrees to a three-month or six-month extension to the original term of the loan, although this too will generate what lenders call an “additional cost of credit” over the lifetime of the loan.

While there may be more pressing, immediate bills arriving in inboxes and higher-interest, short-term credit to be repaid, the option remains to make “overpayments” on a mortgage.

“Even during a payment break, we would encourage you to make full or partial repayments to your mortgage if you can afford it,” says Bank of Ireland.

September cliff edge

For many, that’s a big if. Faced with a precipitous drop in their income, most borrowers will not be thinking about extra costs they will incur over a period of decades by taking a payment break: it will feel like an achievement just to get their repayments going again. But what happens if they can’t?

A six-month payment break will bring borrowers up to at least September, at which point almost all sectors of the economy are scheduled to be open again under the Government’s plan for the phased easing of the lockdown. However, some sectors are unlikely to fully recover from the Covid-19 shutdowns and some businesses may perish from the impossible maths of turning a profit while maintaining social distancing.

The result is that workers whose incomes may have been kept afloat up until this point by the Government’s wage subsidy scheme could be laid off or have their hours slashed.

A wave of arrears issues down the line aren’t in the interest either of lenders or borrowers. That is why the Central Bank has urged the banks to start writing now to borrowers who have availed of the payment break to assess their likely ability to resume normal payments at the end of six months. Lenders will be expected to engage early and fully with borrowers who are now facing longer-term issues and offer more sustainable repayment plans.

In a BPFI guide to the Covid-19 payment break published last week, the industry body says that, for most customers, there won’t be any material difference in how the initial three-month break and the extended payment break works, but in the extension period, borrowers can “expect to receive more communication” from their lender so they can prepare for when the payment break ends.

“If at any stage during the payment break, you are concerned about being able to return to full repayments, you should contact your lender as soon as possible,” it advises.