The FCA has extended the national mortgage holiday but it can’t last forever

Repayment holidays will help borrowers through Covid-19 cash flow crises, writes James Moore, but if the economy doesn’t bounce back some of them will become full-blown cash crises

Forced sales? Repossessions have temporarily been suspended (Getty)

You’re probably not going away this year, even if you can afford to. But there may be a little more sunshine at home if you can’t, thanks to the Financial Conduct Authority extending the national mortgage repayment holiday.

Borrowers in financial difficulty who haven’t started one now have until 31 October to apply. The blanket ban on home repossessions is also being extended to that date.

Some lenders have already gone further – the Nationwide Building Society, for example, last month said no mortgage holder impacted by Covid-19 would lose their home for the next 12 months.

All good, grown-up stuff, and a welcome demonstration that there are parts of the country outside of Westminster that are behaving like this is the 21st century rather than an ugly impression of the 19th. The problem, of course, is that eventually holidays have to come to an end.

The current payment holidays are designed for people facing pandemic-related cash flow crises rather than full-scale cash crises; the sort of difficulties created through, say, being on furlough or grappling with a temporary pay cut that challenges budgeting while an employer rides out the Covid-19 recession.

If the economy recovers quickly from its current malaise, those cash flow crises should ease, allowing repayments to be resumed. The sighs of relief will be audible across the land, and those concerned with this effort will then be able to quietly pat themselves on the back and move on.

The trouble is it might not, and that holds true even if the virus doesn’t throw a spanner into the works. It might very well be that as a result of the government’s ill-thought-out approach to lifting lockdown, exacerbated by the impact that the behaviour of some of its elite members have had on people’s behaviour. You probably know who I’m talking about there.

If the economy doesn’t bounce back quickly, and employers start to lay off furloughed staff when the government’s Job Retention Scheme is withdrawn, if freelancers can’t find work, and the jobs market fails to recover, an awfully large number of those cash flow crises will turn into actual cash crises. Big ones.

Call me a Jeremiah if you will, but that’s not an unrealistic scenario.

There is some comfort to be had from the fact that interest rates are at historic lows, which isn’t going to change anytime soon. To the contrary.

The Bank of England has also released figures revealing that borrowing plummeted in April while deposits surged. Households repaid a net £7.4bn in March, which is a record, despite the abundance of cheap credit that’s available.

So the nation’s collective personal finances are being strengthened.

It’s worth noting, too, that the UK’s record on dealing with struggling borrowers generally has improved markedly.

Writing for the Centre for Economic Policy Research’s Vox, economists Janine Aron and John Muellbauer found a striking contrast between US and UK mortgage delinquency and foreclosure rates during the period after the financial crisis.

The UK also did a lot better than it did during the 1990s.

Among the reasons cited were the quality of its lending when compared to the US, and the fact that borrowers were less leveraged and less incentivised to borrow more than they could really afford than their counterparts across the Atlantic.

They also estimated that increased forbearance by lenders lowered the default rate by 13 per cent while government support lowered it by 21 per cent.

Both may be called upon again to similarly contain default rates. It may require more than that.

Social instability would surely follow a repossession boom. It would also have a detrimental impact on the finances of leaders, we shouldn’t forget that.

It’s something that is probably keeping lenders, and policymakers, up at night. And it should.