Mortgage boom as homeowners cash in and try to reduce debts

Personal Finance Editor,Simon Read
Saturday 22 October 2011 21:05

The number of different mortgage deals has climbed to its highest level for more than two-and-a-half years. But in the same period homeowners have turned their backs on lenders' offers, instead choosing to reduce their mortgage debts.

The Bank of England reported yesterday that homeowners paid £5.8bn off their mortgages in the first quarter of 2011. That followed a record £7.1bn reduction in housing debt in the last three months of 2010.

The Bank of England's housing equity withdrawal figures revealed that householders have now been paying down their average mortgage debt for three years in a row. It means that, since the middle of 2008, homeowners have invested a total of £63.7bn in their properties.

Before the credit crunch the opposite situation was the norm, with persistent housing equity withdrawal between 1997 and the first quarter of 2008. In fact, the record quarterly housing equity withdrawal was the £13.4bn recorded in the first three months of 2007.

Howard Archer, the chief UK economist at IHS Global Insight, said last night: "The overall marked softening in house prices from their late 2007 peak levels has made housing equity withdrawal less attractive."

Meanwhile, the price comparison website Moneyfacts has calculated that there are more mortgage deals now available than at any time since November 2008. However, the rise in the number of offers is unlikely to help the housing market as the majority are aimed at existing homeowners. Some 808 mortgage products require a deposit of at least 25 per cent.

First-time buyers will still struggle to get a deal. There are only a handful of mortgages available to those with a deposit of less than 10 per cent and they often have other restrictions. However, there is some hope for potential borrowers, according to Moneyfact's figures: the number of mortgage deals requiring a 10 per cent deposit has climbed from 176 a year ago to 261 at the start of July.

The paying down of mortgages is bad news for the high street, David Birne, an insolvency practitioner at HW Fishe, warned. "The reduction of mortgage debt is always a good thing for the individual household but when it happens on such a scale and over such a time period it can have major ramifications for business, as less money makes it on to the high street.

"The paydown of debt is a double-edged sword. Consumers battening down the hatches and paying down their mortgages is one of the main reasons the high street is struggling as it is."

Howard Archer agreed that householders continuing to pay down their mortgages was bad news for the ecomony. "The ongoing appreciable net injection of housing equity is adding to the constraints on consumer spending, most notably including negative real wage growth, the increasing fiscal squeeze, high unemployment and elevated debt levels," he said.

Many homeowners had a "strong desire and perceived need" to reduce mortgage debt "to improve their personal financial balance sheets given high debt levels and serious concerns over the economic situation".

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