Downturn causes homeowners to focus on repaying debt

Britons reduced their outstanding mortgage debt by £4.91 billion during the third quarter of the year, figures showed today.

The amount of money people unlocked from their homes was negative 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 last year, when homeowners injected £7.6 billion back into their properties.

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 per cent 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.

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 is bad news for the economy.

Today's figures show that households spent the equivalent of 2 per cent 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 per cent 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."