BER21: The effect of furlough and mortgage holidays on household finances in the West Midlands during the Covid-19 crisis

University of Birmingham

This blog post was produced for inclusion in the Birmingham Economic Review for 2021.

The annual Birmingham Economic Review is produced by the University of Birmingham’s City-REDI and the Greater Birmingham Chambers of Commerce. It is an in-depth exploration of the economy of England’s second city and a high-quality resource for informing research, policy and investment decisions.

This post is featured in Chapter 3 of the Birmingham Economic Review for 2021, on the city’s labour market and current and future challenges

Click here to read the Review.

The Covid-19 pandemic has had widespread effects on households’ health, social interaction, working patterns and financial wellbeing. Key government schemes to shield households from the negative economic effects the crisis are the Mortgage Holiday Scheme and the Coronavirus Job Retention Scheme (Furlough).

As part of an unprecedented package of support, mortgage holidays were announced in March 2020 with the objective of allowing borrowers to stabilise their finances at a time of high uncertainty about future income. The scheme allowed mortgagees to defer payments for three months, with subsequent revisions extending the duration to six months. Moreover, under the Furlough Scheme the UK government pays up to 80% of furloughed employees’ wages, allowing them to remain on payroll rather than being dismissed as organisations shutdown to mitigate the spread of the disease. Both schemes are important safety nets for households amid economic turmoil.

In the West Midlands, 14% of households participate in the Mortgage Holiday Scheme, versus 11% for the rest of the UK.  Mortgage payments are often a household’s largest single expense item, accounting for one third of scheme participants’ monthly income. Before taking a mortgage holiday, subsequent participants tend to have less financial headroom compared to non-participants: they spend 12 percentage points more of household income on mortgage payments and their monthly savings rate is 5 percentage points lower. Covering any shortfall in income is a substantial problem for many households as 37% of Mortgage Holiday Scheme participants did not make any savings during 2019.

Despite their limited financial headroom, mortgage holiday participants were typically not in severe financial difficulties prior to the pandemic: they do not have a history of late payments on mortgages or other household bills at any point over between 2017 and February 2020. Binding financial constraints and loss of income during the pandemic tend to be the main motivation for taking a mortgage holiday. The characteristics of individuals from the West Midlands who participate in the Mortgage Holiday Scheme are similar to participants from the rest of the UK.

Before taking a mortgage holiday, 62% of individuals across the UK are late on mortgage and bill payments. The scheme enables most participants to stabilise their finances. In contrast, only 13% of participants are behind on payments after their mortgage holiday. However, the scheme’s beneficial effects are less pronounced in the West Midlands where 31% of participants continue to experience difficulties paying their mortgage and other bills following the end of their mortgage holiday. Both for the UK and West Midlands, there is no evidence that people from Minority Ethnic backgrounds are more likely than White individuals to be late on payments after a mortgage holiday, conditional on their income, education and job type.

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 spending behaviour. The probability of taking a mortgage holiday increases in the West Midlands from 11% for those who have never been furloughed, to 23% for furloughed individuals. Unemployment is a negligible reason for Mortgage Holiday Scheme uptake: only 0.4% of scheme participants lost their job prior to taking a mortgage holiday.

In the West Midlands, 33% of eligible workers were furloughed at some point during the pandemic, compared to 30% nationally. A person is, on average, furloughed for 5 months and experiences a 17% reduction in their net monthly income, equivalent to £327 while ethnicity has, on average, no significant influence on whether an individual is furloughed.

The Furlough Scheme is effective in preventing large scale financial distress. Our estimates show 37% of furloughed individuals in the West Midlands would have found it very difficult to cover a shortfall in income from being unemployed, since they do not have any monthly savings prior to the pandemic. Among furloughed individuals, 72% are not in severe financial difficulties (measured through late housing or bill payments) despite the reduction in income.

Dr Christoph Görtz (pictured) and Professor Danny McGowan
University of Birmingham