Britons reduced their outstanding mortgage debt by £4.91 billion during the third quarter of the year, Bank of England figures showed today.
Net mortgage borrowing fell for the sixth quarter in a row, as the economic downturn, combined with recent house price falls, caused homeowners to focus on repaying their debt.
But the rate at which people are paying down their mortgage slowed for the third consecutive quarter, according to the Bank of England. The level of repayments peaked in the final quarter of 2008, when homeowners injected £7.6 billion back into their properties.
Stark contrast with previous years
Consumers’ focus on paying down their mortgages is in stark contrast to previous years, when people released equity from their properties to fund large purchases. The rate at which people unlocked money from their homes peaked during the final quarter of 2003, when a record £17.03 billion was released.
But since homeowners stopped unlocking equity in the second quarter of 2008, they have repaid a total of £33.89 billion.
Equity withdrawal enables homeowners to cash in on rising house prices by increasing their mortgages to convert some of the rise in the value of their home into cash. The money is typically used to fund big purchases such as cars or home improvements, or for debt consolidation.
But while people feel confident about increasing the size of their mortgage debt when house prices are booming, they are far less inclined to do so when they are falling and unemployment is rising, leading to the current trend to reduce mortgage debt.
House prices have also fallen by around 20% from their peak to their trough earlier this year, leaving many people with insufficient equity to withdraw.
It has also become more difficult for people to increase the size of their mortgage after banks and building societies tightened their lending criteria in the wake of the credit crunch.
Bad news for the economy
Consumers’ focus on paying off their debts rather than increasing their spending is bad short-term news for the retail economy. Today’s figures show that households spent the equivalent of 2% of their post-tax income on reducing their mortgages. This is a far cry from the final quarter of 2003, when homeowners boosted their income by around 8.5% through releasing money that was tied up in their homes.
Howard Archer, chief UK and European economist at IHS Global Insight, said: ‘The sixth successive, and still marked, net injection of housing equity in the third quarter of 2009 is the consequence of the increased desire of many people to improve their personal balance sheets given the worrying economic situation. Furthermore, recent extremely low savings interest rates have made it much more attractive for many people to use any spare funds that they have to reduce their mortgages.’
Get the best mortgage deal
Martyn Saville, Which? Senior Researcher, commented: ‘The new figures come as no surprise – the past year has seen many consumers hit by the uncertainty of unemployment and short-time working, so it’s only natural that home owners will want to reduce their future exposure to economic shocks by paying down their mortgage while interest rates are still low. After months of gloomy warnings about excessive household debt, people are now listening and taking action.
‘That’s still not a reason to meekly accept the current rate your mortgage provider is offering you though. There are some good mortgage deals appearing on the market, particularly if you’ve got a sizeable deposit or existing equity in your home, so it’s worth shopping around. Switching to a could mean you can pay back your mortgage debt even faster as more of your repayment will be going against the capital owed and less being eaten away by interest.’
© Press Association 2009
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