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Payment holidays and cuts in spending put mortgage borrowers in good position – BoE

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  • 25/06/2021
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Payment holidays and cuts in spending put mortgage borrowers in good position – BoE
Mortgage borrowers were more likely to take up payment holidays and to cut their spending than those with unsecured debt, placing them in a stronger financial position and better able to weather the pandemic.

 

In a quarterly update on household debt, the Bank of England (BoE) said mortgage borrowers tended to have higher incomes than those with unsecured debt and were more likely to be in employment, placing them in a stronger position during the crisis.

The report noted that the proportion of mortgage balances in arrears had stayed relatively stable since the start of the pandemic.

It also found that those with mortgages were more likely to cut their spending compared to those with unsecured debt, who were more likely to use their savings.

This was attributed to mortgage borrowers being concentrated in higher income brackets and having more discretionary income, which was less able to be spent during lockdowns.

However, it caveated this by saying there was little evidence that those with high mortgage debt relative to income were more likely to cut back on spending compared to those with lower debt to income.

It said restrictions during lockdown curbed spending regardless of debt level and the take-up of payment deferral schemes meant households did not have the same financial pressures.

This makes Covid-19 distinct from the global financial crisis as during that time, consumers with higher levels of debt were more likely to cut back on their consumption.

The report said payment deferrals have had a bigger impact on mortgage borrowers, with figures from UK Finance indicating that around one in six UK mortgages was on a payment holiday in June 2020.

It said borrowers on a payment deferral were less likely to cut spending despite a fall in income.

The report noted that a large swathe of payment deferrals had been taken for “precautionary reasons” and a third of households who took them did not experience a fall in income. It added that a vast majority have now returned to full or partial payments.

 

Renters and buy-to-let

The report said whilst Covid-19 had a larger impact on renters’ finances than homeowners or those with a mortgage, the majority of renters kept up with rent and consumer credit payments.

Despite the fact renters were more likely to have lost jobs or be furloughed, rental deferrals were not common.

The report also noted that although there were concerns renters who were struggling financially could threaten the income of buy-to-let (BTL) landlords, evidence suggested that most borrwers were not “overly reliant on rental income”.

This benefits house prices, as a fall in income could lead BTL borrowers to sell properties quickly and therefore aggravate declines.

However, the report noted renters could be more vulnerable to future shocks and the roll-back of government schemes as they typically have less savings to fall back on.

It also noted that some households may already being feeling increased pressure due to the end of the eviction ban in May.

 

Better off than the financial crisis

Overall, the report said UK households were in a stronger financial position than they were going into the global financial crisis in 2008.

The report noted the total stock of UK household debt, excluding student loans, was around 123 per cent of total household income, which is below the peak of 145 per cent in 2008.

Mortgage debt accounted for four fifths of the total stock of UK household debt, with consumer credit making up the final share.

It said the implementation of Financial Policy Committee’s (FPC) mortgage market recommendations in 2014 helped limit a significant increase in the number of households with high debt burdens.

It also said the banking system was better capitalised, allowing lenders to offer more support to households.

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