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Homeowners continue to cut debt

Homeowners are increasingly paying off their mortgages under the impact of falling house prices and lower interest rates, Bank of England figures show.

Housing equity withdrawal, where home owners cash in on the increased value of their homes, has now reversed for nine months in a row.

A further £8bn of mortgage borrowing was paid off between October and December, the Bank said.

More than £300bn has been borrowed through equity withdrawal since 2000.

This gave a huge boost to the after-tax incomes of the average household in the decade leading up to early 2008.

This hit a peak in late 2003 when the extra borrowing increased household incomes by 8.5%.

Last year though, the reverse process of increasing mortgage equity started to drain households of their cash.

In the last three months of 2008 this amounted to 3.3% of their after-tax incomes.

Less lending

Housing equity withdrawal has gone into reverse in the past year for several related reasons.

The banking crisis has forced banks and building societies to restrict their lending, so fewer people are moving and using the opportunity to borrow more.

Lenders are also much more reluctant to grant extra loans while house prices are falling fast rather than going up.

The recession and rising unemployment are deterring people from taking on new debts.

And some existing borrowers, who have seen their monthly interest payments slashed by record low interest rates, are using their windfalls to pay off their mortgages more quickly.

Wider impact

Last month, an analysis by the Office for National Statistics (ONS) made it clear that the collapse in the property market had triggered a big change in the nation's spending habits in the past year.

Sales of household goods dropped by 9% in the year to February as people moved less and spent less on their homes.

"While it is good to see people paying down their debt and building up equity in their homes, this process is bad news for business and the economy," said David Breger, of HW Fisher chartered accountants.

"If people are paying down their home loans, they are not spending, and if they are not spending UK companies and the economy generally will continue to suffer," he added.

Story from BBC NEWS:

Print   2009-04-02