Wednesday, November 30, 2011

UK homeowners reduce mortgages by most since at least 1970

A Telegraph article reports that UK homeowners paid back their mortgages by the most since at least 1970.

Regular readers understand that this reflects the low interest rate policies being pursued by the global central banks.

When individuals compare investment options, they see that paying down their mortgage offers a much higher return at much lower risk than any alternative.  This is particularly true outside of the US where there is recourse to the borrower until the mortgage has been paid off.

Home owners paid back £9.15bn more than they took out from their mortgage in the three months to the end of June, the figures showed. This was the most consumers have ever paid back in a three-month period since at least 1970, when the Bank of England started collecting data. 
Until the financial crisis families have – with a few exceptions – regularly remortgaged their homes and used the money to fund holidays, new cars, school fees or other big purchases. 
Housing equity withdrawal, as it is technically called, is one of the most important drivers of the economy because the money unlocked from property then ends up boosting consumer spending. 
During the housing boom of the 1980s and also over the last ten years, billions of pounds were taken out each month and then pumped back into the high street economy. 
However, with house prices hardly budging in the last three years, with the exception of central London, there has been little incentive for home owners to remortgage their properties. Even those that might have wanted to have struggled to find a bank willing to undertake the transaction. 
Housing equity withdrawal has been in negative territory for 13 consecutive quarters. 
Since June 2008, a total £92.9bn has now been paid back by home owners, a vast sum that has failed to enter the consumer economy, explaining why so many high street shops, restaurants and travel companies have been feeling the pinch. 
Economists pointed out that while the record figure was bad for the economy, the money was being used to pay back mortgages – a sensible move for many indebted families on an individual level, a sign of how nervous they were about the future.... 
Howard Archer at IHS Global Insight, said: "... extremely low savings interest rates have made it much more attractive for many people to use any spare funds that they have to reduce their mortgages. In particular, many people may be using the extra money that is resulting from their very low mortgage interest payments to reduce the balance that they still owe on their houses."
So individuals are taking advantage of the reduction in their monthly payments from refinancing their mortgages to pay down their mortgage debt faster. 

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