UK homeowners 'focusing on repaying mortgages' » Housing » 24dash.com

Britons are no longer withdrawing equity from their homes to fund large purchases but are instead focusing on repaying their mortgages, figures showed today.

The amount of money unlocked from property during the second quarter of the year turned negative for the first time since 1998 to stand at minus £2.76 billion, according to the Bank of England.

The negative figure means that rather than extending their mortgage debt during the period, people increased their housing equity.

The figure, which was the largest net injection of equity since the records began in 1970, is in stark contrast to the £5.24 billion that people unlocked from their homes during the first quarter - and that was the lowest figure for nearly seven years.

Equity withdrawal enables homeowners to cash in on rising house prices by increasing their mortgages to convert some of the gains 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 during a period when house prices are booming, they are far less inclined to do so when they are falling.

The situation has been made worse by lenders tightening their lending criteria in the face of the credit crunch, making it more difficult and expensive for people to remortgage, particularly if they want to borrow a high proportion of their home's value.

Consumers will also be feeling less confident in the face of the deteriorating economy and rising unemployment.

The figures for equity withdrawal have been steadily falling since the third quarter of last year, around the time that property price falls were picked up by house price indexes.

Today's figure is a far cry from the record £17.12 billion of equity that was unlocked during the final quarter of 2003, and is also well down on the £9.66 billion withdrawn during the same period of 2007.

Consumers' reluctance to cash in on their property wealth is bad news for retailers, with equity release during the first quarter accounting for 2.3% of people's post-tax income.

Howard Archer, chief UK and European economist at Global Insight, said: "Higher mortgage rates, markedly tighter credit conditions and falling house prices have increasingly reduced the attractiveness of, and scope for, housing equity withdrawal, to the extent that householders made a net repayment."

He said negative housing equity withdrawal added to the mounting pressure on consumer spending already coming from modest disposable income growth, the rising cost of living and higher unemployment.

He added: "This reinforces the belief that we are in for an extended period of serious consumer retrenchment."

Simon Rubinsohn, chief economist at the Royal Institution of Chartered Surveyors, said: "Equity withdrawal turning negative for the first time since the late 1990s sends a clear message that the downturn in the housing market is reducing access to equity built up in property over recent years.

"This has contributed to consumer spending falling in the second quarter and we expect this trend to continue for some time to come.

"Against an increasingly gloomy economic backdrop, there is a strong case for the Bank of England to take decisive action and cut interest rates at next week's meeting."