Homeowners paid back £5.7bn in third quarter

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Homeowners injected a net total of almost £5.7bn of equity into their homes in the third quarter of the year, as sharply falling house prices encouraged families to pay down their mortgages at a faster rate.

The figures, published by the Bank of England yesterday, illustrate a rapid reversal in mortgage market trends over the past year. In the third quarter of 2007, a net total of more than £11bn was withdrawn from people's properties, as they extended home loans and cashed in on the rise in property prices.

However, since the middle of last year house prices have fallen sharply, while new mortgages have also become much harder to come by. As a result, fewer families have been able to extend their mortgages. Instead, homeowners have been making overpayments on their mortgages, in an attempt to reduce their leverage and monthly repayments.

It was the second successive quarter showing a net injection of equity in the housing market. During the second quarter of 2008, homeowners injected a net £1.95bn into their homes – the first net injection since 1998.

"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," said Howard Archer, chief UK economist at the financial consultancy Global Insight. "In addition, increasingly lower savings rates have made it relatively more attractive for many people to use any spare funds that they have to reduce their mortgages: hence, the net repayments in the second and third quarters of 2008.

"Housing equity withdrawal has been used significantly to support consumer spending in recent years. Consequently, the sharp turnaround from a substantial withdrawal of housing equity as late as the third quarter of 2007 to a net injection of equity in the second and third quarters of 2008 adds to the already intense downward pressure on consumer spending. This reinforces belief that we are in for an extended period of very serious consumer retrenchment which will be a major factor contributing to GDP contracting sharply in 2009. We currently forecast UK GDP to contract by 2.7 per cent in 2009, with consumer spending declining by around 2 per cent in real terms."

Andrew Montlake, a partner at the mortgage broker Cobalt Capital, added: "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. People are scared stiff of recession and rising unemployment and are now paying down their debts rather than adding to them.

"Many people can't take money out of their homes even if they want to – any equity they had has either been wiped out altogether or seriously eroded by falling house prices. And even if they have got some equity left, there's no guarantee they'll be able to access it anyway given the stringent lending criteria lenders have now adopted."