Can we learn from the UK to help indebted mortgagees from COVID-19?
Examining UK policies that reduced housing repossessions post-GFC
22 September 2020
The impact of COVID-19 economic shutdown has raised the prospect of a large number of Australian households being unable to continue to pay their mortgages in the near future. By mid June (the last available data) 485,063 housing loans had been deferred, which was around 9 per cent of all housing loans. Media reports that up to 20 per cent of households who had deferred their mortgage were at risk of not being able to repay their mortgage in the foreseeable future.
Both governments and lending institutions are keen that a large number of households are not forced to sell their primary residence at the same time: the banks because such ‘firesales’ devalues all housing, which underpins a large volume of their loans; and governments because it can lead to large numbers of households experiencing homelessness or economic collapse, which has destabilising social and political consequences.
Can we learn from the GFC?
While Australia escaped the worst of the economic shutdown caused by the Global Financial Crisis (GFC), overseas other governments developed policies to support homeowners pay their mortgage so as to prevent large scale mortgage defaults and repossessions.
In the UK the Government, banks and other agencies saw a rapid increase in the numbers of households in arrears and possessions, and as a consequence the Government introduced two schemes to support homeowners in mortgage arrears:
- the Mortgage Rescue Scheme (MRS) provided a structured exit from homeownership (usually selling to or a shared equity arrangement with a housing association) for vulnerable households who would otherwise have been entitled to homelessness assistance
- the Homeowners Mortgage Support (HMS) provides support to lenders, such as banks, to encourage them to help mortgagees who were unable to access other support for up to two years.
Under the HMS, lenders allow borrows to not pay all or some of the interest due on their mortgage for a maximum period of two years. If at the end of that time the borrower is unable to pay their mortgage and accrued interest, and then dwelling is sold but doesn’t achieve a sale price high enough to repay the outstanding interest, then the Government underwrites 80 per cent of the deferred interest losses.
An evaluation of the schemes in 2010 revealed that an evaluation of the schemes in 2010 revealed that between January 2009 and March 2010 there were 629 successful applications for MRS, with 613 selling their home and becoming tenants of a housing association, and 16 applicants entering into a shared equity arrangement with a housing association.
The evaluation also showed that by March 2010, only 32 borrowers had become part of the HMS, although a survey of banks and other lenders revealed that over 33,000 borrowers were benefiting from extended forbearance, with over 6,000 of those deferring interest on terms equivalent to Homeowners Mortgage Support.
Other UK support schemes pre-GFC
The UK also provides a Support for mortgage interest (SMI) scheme, which started in 1948 (although with a number of changes since that time), to provide short-term help to prevent repossession by making a contribution towards owner-occupier payments (principally mortgage interest payments) while claimants take steps to move back into work.
Currently the scheme is a loan from the Department of Work and Pensions (DWP) to help homeowners pay the interest on their mortgage (but not to repay the capital outstanding on the mortgage). To be eligible, a home owner has to be receiving Government welfare benefit, such as unemployment benefits.
The DWP charges the homeowner interest on their SMI loan. Homeowners need to pay back the loan, but usually only when they sell the property or give it to someone else (as would be the case with an inheritance).
An evaluation (published in 2011) of changes to the operation of SMI through 2009 and 2010 found that SMI was highly effective. As a result of the changes some borrowers avoided arrears. Others accumulated arrears more slowly’ and that ‘Lenders reported that the SMI changes underpinned their willingness and ability to forbear and not seek possession. Lenders were more prepared to consider conversion to interest only mortgages thus ensuring the maximum impact of SMI.
The Australian context
The Australian Banking Association (ABA) reported in early September 2020 that 80,000 deferred mortgages will be assessed by the end of September and a further 180,000 by the end of October. Mortgagees who are struggling financially may be offered a range of options, including continuing a deferral for a further four months (but not everyone will be offered this option) or restructuring or varying their loan, such as converting to an interest only loan for a period of time. Unfortunately these options will not be enough for some mortgagees who may have to sell their home.
At this stage no one can accurately predict the numbers of mortgagees who will be severely affected in Australia, but government strategies (perhaps similar to those of the UK Government) that help prevent a large number of households becoming homeless may be of real social benefit in the future.