Did the Furlough Scheme and Mortgage Holidays Prevent Mortgage Default?

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.