Cautious customers focus on reducing debt

The amount of money people unlocked from their homes was negative for the seventh quarter in a row, as consumers continued to focus on paying down their existing borrowings rather than taking on new debt.

But the rate at which people are paying down their mortgage slowed for the fourth consecutive quarter, to hit its second lowest level since the trend first began in 2008, according to the Bank of England.

The level of repayments peaked in the final quarter of 2008, when homeowners injected 7.11bn back into their properties, in the face of the economic downturn and falling house prices.

Consumers' focus on paying down their mortgages is in stark contrast to previous years, when people released equity from their properties to fund large purchases.

The rate at which people unlocked money from their homes hit a high during the final quarter of 2003, when a record 17.02bn of equity was released.

Equity withdrawal enables homeowners to cash in on rising house prices by increasing their mortgages to convert some of the rise in the value of their home into cash.

The money is typically used to fund big purchases such as cars or home improvements, or for debt consolidation.

But while people feel confident about increasing the size of their mortgage debt when house prices are booming, they are far less inclined to do so when they are falling and unemployment is rising, leading to the current trend to reduce mortgage debt.

House prices fell by around 20 per cent from their peak to their trough in the first half of 2009 and, although they have since risen by around 10 per cent, many people still have insufficient equity in their homes to withdraw money.

The credit crunch has also made it harder for people to increase the size of their mortgage after banks and building societies tightened their lending criteria.

But while people's focus on paying off their debts may be more prudent than tapping into their housing wealth to supplement their spending, it is bad news for the economy.

The figures show that households spent the equivalent of 1.6 per cent of their post-tax income on reducing the amount they owed on their mortgages.

This is a far cry from the final quarter of 2003, when people boosted their income by around 8.5 per cent through releasing money that was tied up in their homes.

Howard Archer, chief UK and European economist at IHS Global Insight, said: "The seventh successive, and still marked, net injection of housing equity in the fourth quarter of 2009 is the consequence of the ongoing desire of many people to improve their personal balance sheets given high debt levels and still serious concerns and uncertainties over the economic situation.

"Housing equity withdrawal has been used significantly to support consumer spending in recent years.

"Consequently, current ongoing net injections of housing equity is adding to the constraints on consumer spending including high unemployment and still falling full-time employment, and muted wage growth."