Did the Furlough Scheme and Mortgage Holidays Prevent Mortgage Default?

Lead Research Organisation: University of Birmingham
Department Name: Accounting and Finance

Abstract

The Covid-19 crisis has inflicted serious financial hardship on UK households and their finances. By May 2020, 14% of borrowers were behind on their mortgage payments. To mitigate the economic damage, the government introduced unprecedented economic policies that provide income support and job protection. Lenders sought to help borrowers in financial distress by introducing mortgage holidays that suspended mortgage payments. To date, more than 10 million workers have been furloughed and almost 2 million borrowers have taken a mortgage holiday.

This project studies whether the Coronavirus Job Retention Scheme (furlough) and lenders' Mortgage Holidays reduced the incidence of mortgage default during the pandemic. By safeguarding jobs and subsidising a worker's monthly wages, the furlough scheme may allow borrowers in tough financial circumstances to continue making monthly mortgage payments. The effectiveness of the furlough policy in preventing mortgage default may change over time as the generosity of support is tapered. Mortgage holidays may lower the incidence of mortgage default by allowing borrowers to defer payments until a later date. However, the limited duration of mortgage holidays (they are typically capped at three months) may constrain the policy's effectiveness and simply postpone mortgage default.

The large-scale introduction of these support schemes is unprecedented in the UK, and despite their widespread use and the substantial costs to government and lenders, we understand little about their effectiveness. This research helps fill this gap and provides insights that help tailor the design of the policies to achieve maximum impact most cost effectively.
To formulate answers, we use data from the Understanding Society Database (USD). The USD follows the lives of almost 40,000 individuals within UK households and provides information on individual and household characteristics as well as data on monthly income, mortgage and interest payments, mortgage repayment problems and whether a person has been furloughed and/or taken a mortgage holiday during the pandemic.

Using the USE and an economic model, we estimate how the probability of mortgage default is influenced by whether a person was furloughed and/or took a mortgage holiday. This allows us to compute estimates for individual households that can then be used to make predictions about the policies' effects at the national and regional levels. This is important because the extent of the pandemic and its economic effects vary substantially across different parts of the country. We can also provide insights into how the policies affected borrowers from different backgrounds. For example, depending on their ethnicity, age and income.

Importantly, we can tailor the model to assess mortgage default under different alternative policy designs. Our work therefore enables decision makers to assess the effectiveness of different future policies to maximise UK households' financial wellbeing and ensure financial resources are allocated effectively. This matters because the longer the pandemic persists, the greater strain it places on government finances. At the same time, the pandemic has affected different regions and demographic groups to different extents. It is therefore imperative that policies are designed so that public funds are spent well to keep the most vulnerable households and regions afloat.

Publications

10 25 50
 
Description The introduction of the furlough scheme by the UK government during the Covid-19 crisis reduces the probability that an individual defaults on their mortgage payments. The introduction of the mortgage policy policy during the crisis has a similar but smaller effect. Furloughed workers dramatically reduce consumption expenditure and drawdown their savings to offset the approximately 20% decrease in their monthly income.
Exploitation Route The outcomes of this funding may be taken forward by policy makers. The findings inform how to design the furlough and mortgage policy policies to ensure value for money to taxpayers and yet maximize social benefits by preventing individuals from defaulting on their mortgage obligations. In addition, the findings help advance the academic literature on the causes of mortgage default. The models we develop are useful for researchers looking to extend the work to consider other types of policies that may affect consumers' mortgage default choices.
Sectors Financial Services, and Management Consultancy,Government, Democracy and Justice

URL https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3914975
 
Description The project's findings have been cited three times in two House of Commons inquiries by the Public Accounts Committees. This has shaped understanding of the government's initial response to the COVID-19 crisis and future government risks. The Money and Pensions Service cite our findings on their slides they use to detail the effects of furlough on household finances. The findings have been used in policy briefings by the National Institute for Economic and Social Research. They have also contributed to Understanding Society's insights publication.
First Year Of Impact 2021
Sector Financial Services, and Management Consultancy
 
Description A second citation by the House of Commons Public Accounts Committee report 'initial lessons from the government's response to the COVID-19 pandemic'
Geographic Reach National 
Policy Influence Type Citation in other policy documents
Impact Understanding the effects of the mortgage holiday scheme on the UK economy
URL https://committees.parliament.uk/work/1225/initial-lessons-from-the-governments-response-to-the-covi...
 
Description Citation by the House of Commons Public Accounts Committee report 'initial lessons from the government's response to the COVID-19 pandemic'
Geographic Reach National 
Policy Influence Type Citation in other policy documents
Impact Improved understanding of the furlough scheme on the UK economy.
URL https://committees.parliament.uk/work/1225/initial-lessons-from-the-governments-response-to-the-covi...
 
Description Money and pension service citation
Geographic Reach National 
Policy Influence Type Citation in systematic reviews
Impact Citation in MAPS advice to consumers about the furlough scheme on household finances
URL https://moneyandpensionsservice.org.uk/financial-wellbeing-in-the-workplace/coronavirus-money-guide-...
 
Description Collaboration with the National Institute for Economic and Social Research 
Organisation National Institute of Economic and Social Research (NIESR)
Country United Kingdom 
Sector Academic/University 
PI Contribution Joint production of a 'box' for the NIESR's UK Economic Outlook
Collaborator Contribution Joint publication of a policy brief on a targeted furlough scheme. A joint policy workshop due to be held in June 2022.
Impact Policy briefing. Joint policy roundtable.
Start Year 2022
 
Description Blog entry 
Form Of Engagement Activity Engagement focused website, blog or social media channel
Part Of Official Scheme? No
Geographic Reach National
Primary Audience Public/other audiences
Results and Impact We wrote a blog entry on the project linked website to provide preliminary results from the research.
Year(s) Of Engagement Activity 2021