Sharp fall in equity release by home owners

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The Independent Online

The amount of money withdrawn from the equity in people's homes has reduced by almost two-thirds the past year, as the credit crunch has forced banks and building societies to tighten their lending criteria.

According to new figures from the Bank of England, only £5bn of equity was withdrawn from homes during the first quarter of 2008, down from almost £14bn in the same period last year, and from £7.4bn in the previous quarter. The figures are the lowest for seven years.

The Bank of England defines its "New Equity Withdrawal" figures as "new borrowing secured on dwellings that is not invested in the housing market [e.g. not used for house purchase or home improvements], so it represents additional funds available for reinvestment or to finance consumption spending". It is mainly accounted for by homeowners who increase their borrowing when they remortgage, but who are not buying a new property, and those who take our secured loans.

The fall in equity withdrawal is almost certainly due to the difficulties in the credit markets, which have seen most lenders tighten their lending criteria.

Howard Archer, the chief UK economist at Global Insight, commented: "Sharply reduced housing equity withdrawal will add to the mounting pressure on consumer spending already coming from modest disposable income growth, rising utility bills, elevated food prices, tighter lending conditions, higher mortgage rates, increased debt levels, tighter and, now, rising unemployment ... We are in for an extended period of consumer retrenchment.

"Housing equity withdrawal is also used for... reducing debts, investing in other financial assets and topping up pensions. A significant proportion of housing equity withdrawal may be due to older people whose children have left home trading down and using the proceeds to supplement their pensions."

The amount of money being withdrawn from residential properties using traditional equity release products – designed for the over 50s – also fell in the first quarter. However, Andrea Rosario, the director general of SHIP, the equity release trade association, said this had mainly been caused by the collapse of Northern Rock, which had been one of the largest players in the equity release market.

She expected the second quarter numbers to show a marked increase in elderly people releasing equity, as they struggled to keep up with rising costs.