How have payment holidays supported mortgage borrowers during the Covid crisis?

The purpose of Bank Overground is to share our internal analysis. Each bite-sized post summarises a piece of analysis that supported a policy or operational decision.
Published on 09 August 2021
Payment holidays have helped mortgage borrowers to manage temporary reductions in their income during the pandemic. Mortgage borrowers with payment holidays were less likely to cut spending.

Covid-19 (Covid) has had an unprecedented impact on the UK economy. In the past, economic shocks have been amplified by household debt, as more highly indebted households cut back sharply on their spending or defaulted on their debts.

There is little evidence that – so far at least – household debt has amplified the Covid recession. Policy interventions – such as income support and payment deferrals – have supported household finances.

Payment deferral schemes in particular, also known as ‘payment holidays’, have provided significant support to many borrowers. The option to defer regular loan repayments has helped households with mortgages avoid sharp spending cuts in response to temporary reductions in their incomes.

Mortgage borrowers with payment deferrals were less likely to report a cut in spending, despite being more likely to have faced a fall in income (Chart A).

Survey evidence also suggests that many payment deferrals at the onset of the crisis may have been taken for precautionary reasons, as about a third of households who took one did not end up experiencing a fall in income. Payment deferrals helped these households to manage the uncertainty around their future financial situation, which might have otherwise led to cuts in spending, amplifying the downturn.

The vast majority of those that took out a payment deferral have since resumed full or partial repayments.

Chart A: Mortgage borrowers with payment deferrals were less likely to cut spending

Net balance of households reporting a change in income and spending due to Covid, reported in April and August/September 2020 (a) (b) (c) (d)

Difference between households reporting increases and decreases in income and spending, split by mortgage payment deferral.

Footnotes

  • Sources: NMG Consulting survey and Bank calculations.
  • (a) In April and August/September 2020 and March 2021, respondents were asked: ‘How has your household income changed relative to usual because of coronavirus?’. Respondents could report different levels of increase or decrease, or report no change in income.
  • (b) In April and August/September 2020 and March 2021, respondents were asked: ‘Thinking about the past month, how has your total household spending differed from what you would have usually spent before the coronavirus pandemic?’. Respondents could report different levels of increase or decrease, or report no change in spending.
  • (c) Net percentage balances are calculated as the percentage of households that reported an increase in income/spending minus the percentage of households that reported a decrease in income/spending. A negative net balance implies that more people reported falls in income/spending than rises.
  • (d) In April and August/September 2020, respondents were asked whether they had taken out a mortgage payment holiday. Questions varied slightly across 2020 H1 and H2, though both tried to capture the number of respondents that were currently or previously on a payment holiday, or had taken a payment holiday extension. We include all respondents that confirmed any of these options.

This post was prepared with the help of Jeremy Franklin, Georgina Green, Lindsey Rice-Jones, Sarah Venables and Teresa Wukovits-Votzi.

This analysis was presented to the Financial Policy Committee in 2021 Q2. For more detail on the impact of Covid on household debt, read our 2021 Q2 Quarterly Bulletin article.

Share your thoughts with us at BankOverground@bankofengland.co.uk.

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