The FCA has outlined proposals for how it expects lenders to treat borrowers who are in financial difficulty as a result of the pandemic once the payment holiday period ends.

It has raised particular concerns about borrowers with second-charge mortgages, warning that they could face greater challenges due to higher rates and the fact interest on missed payments is often charged on a compound basis.

Regarding borrowers in the wider mortgage market, the watchdog says that lenders should look at a range of different forbearance options and tailor these to customers’ individual circumstances and total debt.

The regulator says lenders should contact borrowers as early as possible to discuss arrangements once their deferral period comes to an end.

Lenders must be clear to borrowers about the impact any forbearance measures may have on their credit file.

The FCA says firms should refer borrowers to appropriate debt advice where necessary and take into account factors such as local lockdowns and shielding household members once repossessions resume.

Forbearance measures that the FCA says lenders should consider include:

• Moving borrowers onto interest-only loans or part and part arrangements
• Capitalising any repayments missed during the agreed deferral period and adding them to the outstanding mortgage
• Extending the term of the mortgage
• Reducing the interest rate charged

Lenders are expected to take special care when identifying and supporting vulnerable customers.

Borrowers who took a payment deferral as a result of the pandemic through the government-sanctioned “mortgage holiday” arrangement should not be prevented from switching to a cheaper deal under the FCA’s modified affordability assessment, which was brought in to help mortgage prisoners.

The FCA has also set out how and when it wishes lenders to report payment difficulties to credit reference agencies.

It says that at the end of any payment deferral periods that were granted as a result of its June guidance, any plan to repay the shortfall that is agreed with the borrower should not be reported to credit agencies, so long as borrowers stick to the arrangement.

However, any forbearance measures agreed once this window has closed may be recorded on borrowers’ credit files.

The current guidance for those impacted by coronavirus will apply until October 31 – with borrowers able to take a first or second three-month payment deferral. 

Interim chief executive Christopher Woolard says: “It is important that consumers who can afford to resume mortgage payments should do so. “However, we understand that borrowers facing payment difficulties because of the pandemic will continue to face uncertainty and may also experience temporary interruptions in income. 

“We are proposing that firms contact their borrowers in good time before the end of a payment holiday, and work with them to come up with a tailored plan to help get them back on track. Firms should not take a ‘one size fits all’ approach.”