Mortgage debt drops £3.2bn

Britons reduced their outstanding mortgage debt by £3.2 billion during the first quarter, figures showed today.

The amount of money people unlocked from their homes was negative for the eighth consecutive quarter, as consumers continued to focus on reducing their existing borrowings rather than taking on new debt.

Homeowners have collectively injected £38.3 billion into their housing equity since the trend began in the second quarter of 2008, according to the Bank of England.

But the rate at which people are paying down their mortgage slowed for the fourth consecutive quarter, falling from £3.43 billion in the final three months of 2009 to reach its second lowest level since repayments first began to outstrip equity release.

The rate at which people were repaying their mortgage peaked during the first quarter of 2009, when the economic downturn and falling house prices led to homeowners injecting £7.34 billion back into their properties.

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.

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.

Consumers' focus on paying down their mortgages is in stark contrast to their behaviour during the housing boom, with homeowners unlocking a record £17.06 billion of equity during the final quarter of 2003.

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 1.3 per cent 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 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 eighth successive, and still marked, net injection of housing equity in the first quarter of 2010 is the consequence of the ongoing desire of many people to improve their personal balance sheets.

"Furthermore, 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."

But he added that the trend was contributing to the current constraints on consumer spending.