A Bank of England (BoE) paper, ‘Consumption effects of mortgage payment holidays: evidence during the Covid-19 pandemic’, examined which mortgage borrowers took payment deferrals and the impact it had on their finances.
It said mortgage payment deferrals aided household finances by supporting consumption, or spending on goods and services.
It added: “By supporting their consumption during the pandemic, mortgage payment holidays may have helped avoid the repetition of the 2007-09 Great Recession, when unemployment and arrears increased dramatically as a result of a collapse in aggregate demand.”
The BoE said during the recession, mortgage holders – especially those who were highly indebted – significantly cut their household spending and amplified the ongoing shock in the financial system.
It added: “During the pandemic, however, arrears remained at historically low levels in the UK, suggesting that mortgage payment holidays may have been successful in keeping households current on their mortgages.”
The BoE used data from online budgeting app, Money Dashboard, and looked at transaction data of 13,220 users between January 2019 and November 2020.
It found take up of the deferral was higher among vulnerable households such as those with higher mortgage debt service ratio – the proportion of income which goes on payments. It was also more prevalent among those with negative saving rates or people whose income suffered during the pandemic.
The BoE also found that being financially vulnerable before the pandemic led people to apply for a deferral.
Households with less capital used payment holidays to alleviate any shocks to their income, especially those who had limited access to other resources to budget and support expenditure.
Some households took a deferral for precautionary reasons even if they did not experience a hit to their income, as uncertainty around the pandemic remained.
This was evident in the fact that over half of payment holidays were granted in the first two months of the pandemic, when there was still uncertainty around the short and medium-term effects of the health crisis.
Other borrowers used payment deferrals to secure lower interest rate without having to pay a refinance cost.
BoE said: “Even if households did have access to additional credit sources, taking out a mortgage payment holiday allowed them to access what was very likely, the cheapest form of credit available.”
Borrower type
Borrowers with more than two mortgages were more likely to be on a payment holiday, the analysis found with the probability being 20 per cent higher.
This is because they tended to have higher debt levels and lower savings.
As borrowers with multiple mortgages are typically property investors, it was suggested that they took payment deferrals as they would be hit by income shocks harder, particularly as involuntary repossessions were suspended.
The analysis said: “On the other hand, as these borrowers tend to have investment income, they are also more likely to be financially savvy.
“As a result, they may have used the funds obtained through mortgage payment holiday at historically low mortgage rates for more lucrative investment opportunities.”
Household behaviour
Borrowers who had negative impacts to their income at the start of the first lockdown or before the pandemic were between three and four per cent more likely to take a deferral.
However, there was no link between higher take ups among borrowers who had both negative impacts to income and negative savings at the start of the pandemic. It was found that only one of these factors increased the probability of applying for a deferral.
The unemployed were also less likely to apply for a deferral as they probably had other support such as unemployment benefits.
The average borrower on a mortgage payment holiday was not found to have increased consumption, or household spending on goods and services while payments were deferred. However, for financially constrained households, it was found that spending was up in the first month after payments resumed as well as in the months before the deferral ended.
Financially secure households were more likely to boost their savings during the deferral period.
The analysis said: “It is an open question whether these extra savings will be used to bolster consumption in the aftermath of the pandemic.
“If these additional savings were to remain unused throughout the pandemic due to prevailing uncertainty about future outbreaks, then we would expect the average effects of mortgage payment holidays on aggregate consumption to remain limited.”
Deferral duration
The BoE said it was possible that duration of a payment deferral led households to overspend when the policy was active and reduce spending when payments restarted.
Around 17 per cent of deferrals were longer than three months.
Those with negative saving rates were not likely to extend the deferral period. The BoE said this suggested that payment holidays may not have provided them with the right support.
It added: “If they remained financially vulnerable after the initial payment holiday term, it is plausible that the lender may have decided to offer more tailored forbearance measures to deal with their continuous liquidity issues.”
Income was a driver of deferral duration as it was found that the likelihood of extensions fell among households with income and rose among households which experienced financial shocks.
However, only 12 per cent of financially constrained households extended the deferral beyond three months, compared to 18 per cent of unconstrained borrowers.
The BoE attributed this to the support afforded by the furlough scheme which would have aided incomes.
It said it was also possible that lenders were inclined to give extensions to borrowers with continued but temporary financial difficulties. For those who would not have financial difficulties resolved in the medium-term, lenders may have offered alternative support in line with Financial Conduct Authority (FCA) guidance.
