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Many borrowers took payment holidays as precaution: BoE

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Mortgage borrowers who took payment holidays were less likely to cut spending than those who did not, analysts from the Bank of England report.

The findings suggest that many borrowers asked their lender for a payment holiday as a precautionary measure to protect themselves against the potential financial impact of the pandemic, rather than in response to a loss of earnings.

Writing in a post on the Bank’s website, the analysts say: “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.

“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.”

The analysis was posted as a Bank Overground article, which is where the central bank shares the internal staff thinking that underpins key policy areas.

Original Article

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