Page last updated at 10:45 GMT, Monday, 29 December 2008

Home loan repayments 'a priority'

Terraced houses
Equity withdrawal has altered as house prices have fallen

UK homeowners are no longer cashing in on the value of their properties to fund spending, official figures show.

Quarterly Bank of England figures on housing equity withdrawal showed a second successive negative reading between July and September.

Housing equity withdrawal is when owners take out bigger mortgages, extracting money to spend on major purchases such as cars.

But households put 5.7bn of equity back into homes in the third quarter.

This came after they put 2bn back into their homes in the second three months of the year as property prices started to fall sharply.

This is in stark contrast to 5.6bn housing equity withdrawn in the first three months of the year and 11.1bn withdrawn in July to September last year.

The latest data shows that people are concentrating on repaying their mortgage, rather than adding to their debts.

Changing trend

Billions of pounds were extracted during the housing market boom as people saw the value of their property surge.

People are scared stiff of recession and rising unemployment and are now paying down their debts rather than adding to them
Andrew Montlake
Mortgage broker Cobalt Capital

It was highest in the last three months of 2003 at 17.1bn, and was consistently above 11bn in each quarter of 2006.

This funded consumer spending, as it is defined in the figures as money that is not invested back into property or home improvements.

In April to June this year, the figure turned negative for the first time since the second quarter of 1998.

The latest statistic shows this trend has continued as it is the biggest injection of equity since the figures were first compiled in 1970.

"Not so long ago, an Englishman's house wasn't just his castle, it was his cash machine, too. This, very clearly, is no longer the case," said Andrew Montlake, partner at independent mortgage broker Cobalt Capital.

"People are scared stiff of recession and rising unemployment and are now paying down their debts rather than adding to them."

Lending squeeze

He added that for many people equity withdrawal was no longer an option, owing to the rapid dip in house prices.

The latest data from the Halifax showed the annual rate of house price falls dropped to 14.9% in November.

For those who still had equity in their homes, lenders were becoming more stringent as to whether homeowners could access it by extending their home loan, Mr Montlake said.

Mortgage lending as a whole has shrunk in the UK with the number of approvals from the major banks for house purchases 60% lower than a year ago, according to November figures from the British Bankers' Association.

Howard Archer, chief UK and European economist at IHS Global Insight, said that housing equity withdrawal had "been used significantly to support consumer spending in recent years".

He added that the latest figures were further evidence that consumers were reluctant to spend, leading to UK economic growth contracting sharply in 2009.

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Guardian Unlimited Mortgages repaid at fastest rate for 40 years - 19 hrs ago
The Scotsman Homeowners opt to cut mortgage debt - 32 hrs ago
This Is Money Homeowners rush to pay back mortgages - 41 hrs ago
Telegraph Homeowners stop cashing in on the value of their homes - 42 hrs ago

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