Written evidence submitted by Dr Christoph Görtz, Dr Danny McGowan and Dr Mallory Yeromonahod
Written Evidence Relating to the Mortgage Holiday Scheme.
1. The research underpinning this written evidence has been undertaken based on a UKRI/ESRC funded project (ES/V015958/1) on policy effects during the COVID-19 pandemic. The research has been conducted at the University of Birmingham and studies the effects of the Mortgage Holiday Scheme on household finances.
2. Our analysis uses probit regression analysis applied to survey data from the Understanding Society Database (USD), provided by the UK Data Service. This data set tracks over 16,000 households since 2010 and is representative of the UK population. We study the effects of the Mortgage Holiday Scheme on household finances during the pandemic by using responses to a novel USD COVID-19 survey that comprises eight waves between April 2020 and April 2021.
3. Our study derives unique inferences about the Mortgage Holiday Scheme and its effects on household finances by using this novel COVID-19 survey data set. We establish how participation in the Mortgage Holiday Scheme influences households’ financial well-being and its effectiveness in preventing financial distress. Our key findings show
Characteristics of individuals who opt into the Mortgage Holiday Scheme
4. 10.9% of individuals in the survey with a mortgage participate in the Mortgage Holiday Scheme. Participants have a net monthly household income that is 10% lower compared to individuals who do not defer mortgage payments using the scheme. Participants are on average 44 years old versus 42 years for non-participants. Larger households and those with young children are more likely to take a mortgage holiday.
5. Before taking a mortgage holiday, subsequent participants have less financial headroom compared to non-participants: they spend 4 percentage points more of household income on mortgage payments and their monthly savings rate is 11.25 percentage points lower. Mortgage payments account for 39% of subsequent participants’ monthly income. 40% of participants do not make any savings during 2019, and participants who do save receive more than three times less annual income from savings than non-participants.
6. Despite their limited financial headroom, mortgage holiday participants were typically not in severe financial difficulties prior to the pandemic. We find that a history of late payments on mortgages or other household bills, at any time between 2017 and February 2020, does not affect the likelihood of opting into the Mortgage Holiday Scheme.
7. The Coronavirus Job Retention Scheme has a large effect on the decision to take a mortgage holiday: income loss from being furloughed requires households with little financial headroom to reorganise their finances. The probability of taking a mortgage holiday increases from 8.8% for those who have never been furloughed, to 18.5% for furloughed individuals. Unemployment is a negligible reason for scheme uptake: only 0.4% of participants lost their job prior to taking a mortgage holiday.
8. Our results indicate that binding financial constraints and loss of income during the pandemic are the main motivation for opting into the Mortgage Holiday Scheme. We find that individuals do not participate in the scheme as a precautionary measure, e.g. due to a low income or employment in a low-skilled job. We also find that individuals’ ethnicity, geographical location and gender play, on average, no role in an individual’s decision to participate in the Mortgage Holiday Scheme.
The effects of mortgage holidays on household finances
9. Mortgage holidays prevent severe financial distress for the vast majority of participants despite their limited financial headroom. After the end of a mortgage holiday, by April 2021, 93.0% of participants are on time with their mortgage payments and 86.9% are on time with their mortgage payments and other bills. Nonetheless, the remaining 13.1% of participants are in severe financial difficulties.
10. Of those facing severe financial pressure before taking a mortgage holiday, the scheme enabled approximately two thirds of individuals to stabilise their finances. 62.2% of individuals who are late on payments before participating in the scheme, are not late on payments by April 2021.
11. People from Black, Asian and Minority Ethnic (BAME) backgrounds are not more likely to be late on payments after a mortgage holiday compared to White individuals, conditional on their income, education and job type.
12. Even though it plays no role in the decision to opt into the Mortgage Holiday Scheme, the number of household earners has an effect on whether payments are late after a mortgage holiday. After a mortgage holiday, a household with a single-earner has a probability of subsequent late mortgage payments of 12.8%, compared to 5.9% for a two-income earner household. A second income appears to act as a financial safety net against adverse income shocks.
13. A person’s type of employment has no effect on their decision to participate in the Mortgage Holiday Scheme. However, among those who take a mortgage holiday, employees in routine jobs are far more likely to be late with their mortgage payments (16.7%) compared to employees in intermediate or managerial roles (4.1%). While job type is an important factor, net income does not determine whether a person is late on their payments.