In the 10 years before the credit crisis, homeowners regularly used equity release as a cheap source of finance. In the last quarter of 2003, equity withdrawal reached a peak of £17.1bn. By 2006, the annual figure had dropped back to £50bn.
However, using equity release as a way of boosting spending power came to an abrupt end once the recession kicked in. In fact, homeowners became much more interested in reducing their debts and since March 2008, £44.2bn has been paid in additional mortgage repayments.
In Q2 this year, homeowners reduced their mortgages by £6.2bn, the largest cash injection since the first quarter of 2009.
Mortgage lending companies are making it increasingly difficult for borrowers to avail of equity release due to tougher lending criteria and with home owners concerned about job stability, the priority is now debt reduction.
David Smith, a senior partner at Carter Jonas, said that homeowners are doing exactly the opposite of what the deputy governor of the Bank of England wants them to do, which is spend. But he pointed out that in the long run, reducing outstanding mortgage debt will benefit the housing market and the economy.
The Bank of England is expecting lenders to tighten further their credit scoring criteria over the next three months which will make it even harder for first time buyers to get a mortgage. There are also concerns that people looking to remortgage will face higher rates than they do at present.
Lenders are worried that the government’s austerity measures will lead to higher unemployment with the knock on affect that more people will default on contractor mortgage repayments. But if lending criteria tighten further and people cannot get an attractive rate when they remortgage, the problem will get worse.
The UK’s current outstanding mortgage debt stands at £1.24 trillion.
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