Homeowners Hanging On – House Equity Release Falling Out of Favour

Published: 06 October 2008

Homeowners Hanging On – House Equity Release Falling Out of Favour

According to figures from the Bank of England, homeowners in the UK are no longer using house equity release to raise extra money to spend on home improvement projects or other major spending. Instead they are preferring to pay off more of their mortgages, meaning that for the first time in ten years the Bank of England’s figures for housing equity withdrawal are negative. In other words, people have been reducing debt on their homes in preference to using them as a means of raising extra cash.

Housing equity release dried up in the April to June quarter of this year, with households adding £2.8bn of equity to their homes, the first negative withdrawal figures since 1998. Falling house prices and a rapid rise in mortgage rates have driven the inflow of money, meaning to remortgage or to extend an existing mortgage is no longer a cheap and easy way of making money to pay for large purchases or for debt consolidation.

The impact of the credit crunch has also made it harder for equity release plans to be used with the tighter criteria being introduced by lenders. Concerns over the safety of jobs and the spectre of possible unemployment have also caused homeowners to consider carefully whether to increase their debts at the current time.

The chief economist at Global Insight, Howard Archer thinks that the fall in withdrawals means a cut in the spending that homeowners are prepared to make. He says, ‘Negative housing equity withdrawal adds to the mounting pressure on consumer spending already coming from modest disposable income growth, rising utility bills, elevated food prices, tighter lending conditions, higher mortgage rate, increased debt levels, and tighter and – now – rising unemployment.’

He adds, ‘This reinforces the belief that we are in for an extended period of serious consumer retrenchment.’ Simon Rubinsohn, chief economist at the Royal Institution of Chartered surveyors comments that the fact that house equity release has turned negative for the first time since the late 1990s ‘sends a clear message that the downturn in the housing market is reducing access to equity built up in property over recent years.’

Many consumers are now asking what steps they should take to avoid the worst impact of the credit crunch. Vince Cable, the Treasury Spokesman for the Liberal Democrats has this advice to offer. ‘I would warn them that no investment, including property rises forever. I would discourage people from conventional safe havens like gold and cash under the bed since that degree of panic is unnecessary and produces no income.’

Many experts think that the repayment of debt should be a priority in these troubled times. Although debt consolidation can be tempting, consumers should first review their finances and try to cut spending. Martin Lewis from the website moneysaving expert.com has this advice to offer. ‘The biggest tip I can give is that more people are impacted by inflation than the credit crunch – the price of food, gas and electricity and petrol are all hitting home very hard. Simply take a day at a weekend to systematically work through your finances. The average person in the UK is throwing away 20% of their salary by spending too much on products.’

With the money saved from such a financial review the advice is simple. Andrew Verity from the Radio 5 programme ‘Wake Up to Money’ says, ‘My top investment tip is actually rather boring. Pay off your debts. It’s one of very few investments that is totally tax exempt and you also get a guaranteed rate of return.’

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