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• Homeowners repaid £8bn in the last quarter of 2008
• Borrowers unable to raise extra funds through their homes
Homeowners reduced their mortgage debt by a record £8bn during the final quarter of last year, figures from the Bank of England showed today.
The amount of equity people withdrew from their homes was negative for the third quarter running, suggesting falling house prices and lenders' reluctance to offer big loans have put a stop to borrowers turning to their homes to raise extra funds.
Instead, in the last three months of 2008 homeowners made the biggest net injection of equity since records began in 1970.The rate at which people are repaying their mortgage accelerated from the third quarter, when net repayments of £5.9bn were made.
In the last three months of 2007, when house prices had only just begun their downward trajectory, homeowners increased their borrowing against their properties by £6.7bn, and in the first quarter of last year the figure was still positive, as homeowners withdrew £6.6bn.
In the first quarter of 2007, when house prices were booming and the credit crunch was yet to hit, equity withdrawal amounted to £13.9bn – just over 6% of post-tax household income. By the end of last year equity withdrawal represented -3.3% of post-tax income.
At the peak of the housing market many borrowers viewed their properties as a way to raise an easy loan to fund big purchases, like holidays and news cars. But double-digit house price falls have left some with little equity in their property to tap into, and made lenders reluctant to offer large loan-to-value mortgages. Borrowers who do want to remortgage to raise cash are facing high interest rates if they ask to borrow more than 60% of their home's value.
"After mutating into a cash machine for a number of years, an Englishman's home is once again his castle," said Andrew Montlake, director of independent mortgage broker Coreco.
"This behaviour fits in with the current zeitgeist. Saving and paying down debt, as opposed to tapping your home for another exotic jaunt abroad, is now in vogue, and as dull as it may seem it is just what the doctor ordered."
However, Montlake said the problems some borrowers faced when trying to raise funds against their homes could stifle new businesses. "A more serious point for the economy as a whole is that many small businesses are traditionally started with borrowing, and often the best security people have [to borrow] is their home.
"Small businesses are the lifeblood of a healthy economy, and this lack of credit is therefore a further choke on the economy."
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