News
Borrowers have not overpaid through downturn
Borrowers have not been overpaying their mortgages in recent years, as commonly believed.
The latest Home Equity Withdrawal report from the Bank of England has clarifies that, while withdrawal has been negative for some years, this is a function of a subdued housing market.
Rather than longer-standing homeowners taking advantage of low interest rates to overpay their mortgages and increase their equity levels, resulting in lower borrowing levels against existing housing stock, the Bank claims that lower equity withdrawal is a result of mortgage borrowing falling to a third of its pre-crunch levels.
In a 2011 Q2 Quarterly Bulletin, economist Kate Reinold said: “The fall in the number of housing transactions is therefore likely to have been a key driver of the fall in equity withdrawal since the financial crisis. There is little sign that, at the aggregate level, households are making an active effort to pay down debt more quickly than in the past.”
The complex data also reflects factors like equity withdrawal through further advances, value boosts from DIY and the number of housing market transactions, however, it does not reflect house price rises.
The BoE’s negative figure of -£8.6bn indicates a continued injection of housing equity by households overall, with remortgaging levels staying weaker than house purchase.
Mark Harris, chief executive of mortgage broker SPF Private Clients, said: “In these uncertain economic times, it would make sense that homeowners overpay on their mortgages in order to reduce the balance more quickly, particularly if they have an interest-only mortgage, but this is not happening.
He added: “This is likely to be down to the rising cost of living and the fact that many households are struggling with costs, with few in a position to overpay on their mortgage.”
Chris Love, director of independent mortgage broker, Mortgage Simplicity, said: “It’s hard to take equity out of your home if you have none of it, or very little. Lender criteria just won’t allow it. Likewise, people are no longer moving home as much, which is a natural catalyst for equity withdrawal.
“Long gone are the days when your property was a cash machine. In five or six years, we have witnessed a phenomenal volte face.”