Big turnaround as homeowners opt to cut their mortgage debts

HOMEOWNERS paid a record amount of their mortgage debt in the first three months of this year, it was revealed yesterday.

Borrowers injected £8.1 billion more equity into their homes than they withdrew, according to the Bank of England, the highest figure since 1970.

It was the fourth successive quarter in which homeowners opted to pay down their mortgage debts and build up the amount of equity in their properties rather than use that equity to fund spending.

The figure contrasted with the £6.7bn homeowners released from their property in the same period last year.

Housing equity withdrawals have helped fuel consumer spending in recent years, so the trend away from that and towards putting more equity into properties has added to the downward pressure on spending.

In every quarter between 1997 and the start of 2008, more equity was withdrawn from properties than injected, reaching a peak in the final three months of 2003 when net housing equity withdrawal totalled a record £17.3bn.

The trend reversal is bad news for the high street, however. Equity withdrawal accounted for 2.9 per cent of borrowers' post-tax income during the first three months of last year, but in the same quarter of this year, they spent the equivalent of 3.5 per cent of their pay reducing their mortgage debt.

The turnaround, which is likely to have helped drive household spending to the 29-year low revealed by the Office for National Statistics earlier this week, reflected a growing prudence among borrowers, according to Ashley Brown, director of Moneysprite, a mortgage broker.

"Homeowners now recognise that this is the time to batten down the hatches and reduce their debt rather than live on credit," he said.

Howard Archer, chief UK and European economist at IHS Global Insight, said a combination of tight credit conditions and lower house prices had made equity withdrawal less attractive and harder to carry out.

"In addition, ever lower savings rates have made it increasingly more attractive for many people to use any spare funds that they have to reduce their mortgages," he said.

Low interest rates have also encouraged borrowers to pay down their mortgages. Those with tracker mortgages and on standard variable rates have particularly benefited, with many taking the opportunity to overpay their loans.

And, despite signs of housing market stability, the cautious mood is unlikely to change soon, says Simon Rubinsohn, chief economist at the Royal Institution of Chartered Surveyors.

"It is improbable that housing capital, in the near term, will be viewed as a source of wealth that can be drawn down by homeowners to supplement their income," he predicted.