Borrowers pay off £7 billion mortgages

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The Independent Online

Mortgages were paid down at a record rate in the final quarter of last year, figures revealed today, as homeowners moved to improve their personal balance sheets.

Borrowers reduced their outstanding mortgage debt by £7 billion during the three months to the end of December, the Bank of England said.

It was the 11th consecutive quarter during which the amount of money people unlocked from their homes was negative and the highest net injection of housing equity since records began in 1970.

The recent trend among homeowners to pay down their mortgages contrasts with their behaviour during the housing boom.

Homeowners have now collectively injected £57.4 billion into their housing equity since the trend began in the second quarter of 2008.

The rate at which people are reducing their mortgages accelerated for the fourth quarter in a row during the three months to the end of December, with the latest figure up on the £6.6 billion injected in the third quarter of the year.

Howard Archer, chief UK and European economist at IHS Global Insight, said the figures highlighted "the strong desire and perceived need" of many people to improve their personal balance sheets given high debt levels and serious concerns and uncertainties over the economic situation.

He added: "Extremely low savings rates have made it much more attractive for many people to use any spare funds that they have to reduce their mortgages."

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 the outlook for the property market and employment is uncertain.

The housing market downturn has also left many people with insufficient equity in their homes to withdraw money, while the credit crunch has made it harder for people to increase the size of their mortgage due to the tighter lending criteria banks and building societies now apply.

But while people's focus on paying off their debts may be more prudent than tapping into their housing wealth to supplement their spending, it can damage the economic recovery.

The latest figures show that households spent the equivalent of 2.7% of their post-tax income on reducing their mortgages.

This is a far cry from the final quarter of 2003, when people boosted their income by around 8.5% through releasing money that was tied up in their homes.

Mr Archer added: "The ongoing appreciable net injection of housing equity is adding to the constraints on consumer spending, most notably including high unemployment, negative real wage growth, the increasing fiscal squeeze and high debt levels."

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