Mortgage debt down by record £8 billion

Britons reduced their mortgage debt by a record £8.14 billion during the first quarter of the year, figures showed today.

Falling house prices and the economic downturn have put people off taking money out of their property, leading to equity withdrawal being negative for the fourth quarter in a row.

The rate at which people are repaying their mortgages has also continued to accelerate compared with the final quarter of last year, when home-owners made net mortgage repayments of £7.76 billion, according to the Bank of England.

Homeowners' focus on paying down their mortgages is in stark contrast to figures for the same period of last year, when people released £6.73 billion from their properties to fund large purchases, although this was itself the lowest figure for six years.

But while people's focus on paying down their debt may be more prudent than tapping into their housing wealth to supplement their spending, it is bad news for beleaguered retailers.

Equity withdrawal accounted for 2.9% of people's post-tax income during the first quarter of 2008, but during the first quarter of this year, they spent the equivalent of 3.5% of their pay paying down their mortgage.

This turnaround is likely to have contributed to the fall in consumer spending seen during the first three months of the year, with figures from the Office for National Statistics released earlier this week showing the biggest drop in household spending since 1980 in the first quarter.

The latest figures are a far cry from the record £17.09 billion of equity that was unlocked during the final quarter of 2003.

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.

House price falls of more than 20% since the market peaked in July 2007 also mean many people no longer have sufficient equity left in their property for them to withdraw.

The credit crunch has also led to banks and building societies tightening their lending criteria, making it more difficult and expensive for people to extend their mortgage, particularly if they have only a small equity stake left in their home.

Howard Archer, chief UK and European economist at IHS Global Insight, said: "Sharply falling house prices have made housing equity withdrawal increasingly unattractive, while very tight credit conditions have made it more difficult to carry out the process as well as to take out new mortgages.

"In addition, ever lower savings rates have made it increasingly more attractive for many people to use any spare funds that they have to reduce their mortgages.

"Housing equity withdrawal has been used significantly to support consumer spending in recent years. Consequently, the sharp turnaround from substantial withdrawals to a net injection of equity over the past year has added to the downward pressure on consumer spending."

Simon Rubinsohn, chief economist at the Royal Institution of Chartered Surveyors, said: "This (drop) is not a surprise given the fall in house prices over the period and will have contributed in no small way to the weakness in high street spending.

"There have been some tentative signs of a stabilisation in the property market but it is improbable that housing capital, in the near term, will be viewed as a source of wealth that can be drawn down by homeowners to supplement their income."

As a result, he said he expected consumer spending to remain relatively subdued during the remainder of this year.