Mortgage holidays surge to two million - Capital Economics
UK Housing

Mortgage holidays surge to two million

UK Housing Market Update
Written by Hansen Lu

The data now point to two million households with mortgage holidays. This suggests that the peak in arrears may be much higher than during the GFC. But, with mortgage credit quality and banks’ financial positions better than in 2007, the outlook for mortgage possessions and impairments is less gloomy.

  • The data now point to two million households with mortgage holidays. This suggests that the peak in arrears may be much higher than during the GFC. But, with mortgage credit quality and banks’ financial positions better than in 2007, the outlook for mortgage possessions and impairments is less gloomy.
  • UK banks are publishing their Q1 2020 results – providing detail on the impact of the coronavirus on the mortgage market and the uptake of the mortgage holiday scheme. The five major UK banks that have published so far reported 1,150,000 mortgage holiday applications or approvals by mid-to-late April. Collectively, they hold 57% of the mortgage stock. If other banks have seen a similar trend, that implies that the total number of mortgage holidays has already hit two million.
  • If this estimate is correct, then that would be a big rise from the UK Finance figure of 1.2 million from the 8th April, and suggests that even their more recent figure of 1.6 million on 24th April may be too low. What’s more, it suggests that mortgage arrears will blow past the level seen during the global financial crisis (GFC), when the number of mortgages with over three months of arrears peaked at 288,000. Admittedly, payment holidays are not treated as arrears, so borrowers have longer than usual to get their finances back in order. Still, to avoid breaching the previous record, a hefty 85% of households who currently have payment holidays would need to resume payments by September.
  • Admittedly, a good number of households with payment holidays should resume their payments quickly. After all, payment holidays can be taken by anyone, not just those in serious financial distress. Furthermore, as the shutdown is eased, employment should see a quick return to growth. And, while mortgage holidays don’t initially affect a borrower’s credit score, further non-payment has more serious consequences. So borrowers have a strong incentive to resume payments if they can.
  • What’s more, even if arrears do rise sharply, lenders’ seem sanguine about the impact on loan losses. Indeed, banks’ latest financial results show they expect rising loan impairments to come mainly from unsecured personal lending and the corporate sector – not the housing market. (See Chart 1.)
  • This partly reflects the low average LTVs on mortgages. For example, Lloyds Banking Group said their 404,000 mortgages with payment holidays had an average LTV of just 50%. But it also reflects better mortgage credit quality. After all, mortgage possessions were already rising before the GFC in 2006 – a sign of poor mortgage credit standards. (See Chart 2.) This time around, possessions entered the crisis at close to a record low. Combined with the fairly prompt recovery in employment we expect to see, that points to a comparatively modest rise in possessions across our forecast.
  • Admittedly, much could go wrong. If the economy sees a more sustained downturn than we expect, or if banks see larger losses than we anticipate, then the outlook for possessions could be worse. We will explore these risks further in an upcoming Update.

Chart 1: Rise in Expected UK Credit Losses (£m, Q1 20)

Chart 2: Unemployment and Mortgage Possessions

Sources: Barclays, Lloyds Banking Group, Santander

Sources: ONS, UK Finance, Capital Economics


Hansen Lu, Property Economist, hansen.lu@capitaleconomics.com