No increase in households’ mortgage prepayments despite higher savings

During the first wave of the coronavirus crisis, households increased their savings at the macroeconomic level. Their free savings increased by EUR 12.4 billion in the second quarter of 2020 compared to the same quarter last year. This growth is due to an increase in disposable income of EUR 2.4 billion and a decrease in consumer spending of EUR 10 billion compared to a year earlier. The free savings ratio – the volume of savings relative to gross disposable income – reached 35%, against an average savings ratio of 25% in the same quarter over the past 5 years (16% yearly).  The lockdown and containment measures have significantly reduced consumption opportunities, which is a major reason for the decline in consumer spending. In addition, some of the households have saved extra as a precautionary measure against the high uncertainty surrounding the development of the pandemic and the economy.

current and savings accounts in the second quarter of 2020. Some 63% went to savings accounts and the remaining 37% to overnight deposits (current accounts). Households deposited their savings in ordinary savings accounts rather than deposit accounts. Since the interest rate difference between these two types of savings accounts is negligible, deposits with agreed maturity have been on their return for some time.

Figure 1: Prepayments (volume) by age category*

While the volume of free savings increased sharply, this did not result in a corresponding increase in mortgage prepayments. This is remarkable, as prepayments usually account for a substantial share of free savings (some 25% in the second quarter of 2019). Figure 1 shows the volume of prepayments by age group in the second quarters of 2019 and 2020. All age groups – except the 18-35 age group – show a slight decrease in prepayments. These amounted to a total of EUR 3.5 billion in the second quarter of 2020, an estimated EUR 340 million decrease compared to the same period last year. Moreover, preliminary figures show that prepayments were also lower in the third quarter of 2020 compared to the same quarter a year earlier.

The decrease in the share of prepayments and agreed-maturity deposits in total savings suggests an increased preference for more liquid savings in households over the age of 35 as a result of the coronavirus crisis. Unlike deposits in current and ordinary savings accounts, assets accumulated in the home and agreed-maturity deposits are not immediately withdrawable. Consequently, households cannot use them to absorb income drops or unexpected expenses, for example, unless they are able to convert the excess value of the home through an equity release mortgage.

Only younger households (18-35) made more mortgage prepayments than last year. One possible explanation for this is that they want to reduce their financial risks at this particular time. By making prepayments, they reduce their loan-to-value (LTV) - their outstanding mortgage debt relative to the value of their home - which is often relatively high in young households. In addition, when renegotiating or refinancing their mortgage, households may benefit from an interest rate discount if their LTV is lower. For households with a high LTV in particular, it may be attractive to qualify for such interest rate discounts through additional mortgage prepayments.

Figure 2: Average mortgage prepayments by age group

The average prepayment amount in the 18-35 group went up from around EUR 22,000 to around EUR 38,000 (see Figure 2). At the same time, the share of households in this age group that made mortgage prepayments fell slightly. In the second quarter of 2020, 1.9% of households in this age group made mortgage prepayments, compared to 2.1% in the same period last year. The average prepayment amounts for the three older age groups also increased. In these groups, however, the number of households making voluntarily prepayments went down so much that the total volume remained more or less the same.