We have seen unprecedented levels of business and personal financial support made available in recent weeks. Responding to the Covid-19 crisis, banks and the government have made available a wide range of business loans and payment holiday initiatives to help fill the gaps in lost income and revenue.
These responses have been made very quickly, and under extreme pressure. While we hope that the economy bounces back, and quickly, the repercussions of mortgage payment holidays, business interruption loans and loan payment freezes will undoubtedly last for many years to come.
The industry is seeing more than 10% of mortgage holders requesting payment holidays since the measure was announced. While the measure is welcomed by the 1.86 million of customers who have taken a payment holiday, there is uncertainty about what will happen once this holiday period is over.
The future of mortgage payments
After mortgage payment holiday periods have expired, lenders will need to prepare for a range of different customer needs and behaviours depending on their financial situation following the pandemic. A “one size fits all” approach won’t be possible, as individual customer journeys, and the level of support required will vary.
We would expect to see different types of customers, each with their own complex needs:
Uncertain: Including employees in fear of redundancy, as well as the self-employed and business owners. These people will be facing uncertainty on what income they expect over the next six to 12 months as they seek to recover their business from a period of no work or limited trading. They will have needs beyond payment holidays, to reduce payment commitments until their income re-stabilises.
Curtailed: These customers may have been furloughed or received lower levels of income for a short period (three to four months) and requested payment holidays during this period. They are expected to sustain full payments following the payment holiday including uplifts in future payments as a result.
They may want to, and be able to, make over-payments to re-balance their increased monthly instalment over time. Some customers may want to increase the term of their mortgage rather than have higher payments over the same term. There may also be customers who had no financial detriment from the crisis, but who may have taken advantage of payment holidays to reserve funds for their future.
These people may not understand the spread of capital and interest as a result of taking the payment holiday, which could result in customer dissatisfaction over time.
Troubled: These customers are likely to have experienced an unexpected redundancy, perhaps after a period of furlough. They may have found new employment, but at a lower income level. They have suffered a significant impact financially and will be at risk of not being able to meet payments in the short-term as well as longer-term.
There is also a fourth type: the Fortuitous customer. These people have been unaffected financially during the crisis, and may actually have some surplus income available to make over-payments, since their spending may have reduced.
Increase in collections and arrears services
The mortgage industry is likely to see a significant increase in demand on collections and arrears services once the payment holiday period is over, from a mix of the above customer types. The sector is expecting double the usual proportion of customers seeking forbearance measures in the coming months.
During this time, forbearance has never been more important. At a time of national crisis, it’s critical that lenders maintain a focus on customers and ensuring affordability. Using technology such as Open Banking will enable quick and simple affordability checks. Open Banking can also be used to support self-service affordability checks, again speeding up the checking and approval process.
At this time, lenders need to continue to provide compliant services and treat customers fairly, especially for the most vulnerable in society, who will be finding it hard to make payments.
Collections and arrears strategy
Having a comprehensive collections and arrears strategy in place is the first step for lenders to ensure they’re fully prepared for the long road ahead. Understanding customer attributes and behaviour provides excellent insight into how best to manage collections and prepare for arrears.
Such insight enables lenders to be able to work with customers in creating affordable payment plans. Payment plans are designed to deliver the best customer outcome based on each customer’s unique circumstances. This approach works within the customer’s affordability, while still recouping revenue for the lender – an ethical and empathetic approach.
Outsourced customer services
Secondly, outsourcing operations to a collections and arrears specialist enables fully compliant customer services, while flexing capacity up and down with demand fluctuations. This could be as a short-term “plug and play” set up, with a low level of integration, and speedy set up and deployment.
Over time, as the peak of customer demand passes and we see more stability in the economy, there is a perfect opportunity to adapt into longer-term arrears and collections management. This strategic relationship enables value-added services, continuing to support expert handling of vulnerable customers, and good customer outcomes.
An agile and flexible approach
Finally, an agile and flexible approach gives lenders the opportunity to adapt services as guidance and support from the government evolves, and the UK economy emerges from lockdown measures.
There is a significant level of uncertainty in many areas right now, with a lack of clarity expected for the months and years ahead. With uncertainty comes the need to be able to react quickly as things change, to successfully maintain operations.
A short-term contract with an outsourcer offers such flexibility and increase in capacity, without the long-term commitment associated with insourcing.
