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Experts are worried that the recent trend of home owners using their cash to pay off their mortgages at a record amount could hamper the economy.
The news was revealed yesterday as The Bank of England announced that during the last three months of 2010, borrowers increased the equity in their homes by $7 billion. The statistics show that this is the largest injection of cash since the recording was started back in 1970.
The report has highlighted the contrast between the same period three years ago when home owners used £6.6 billion from their properties to put towards large purchases. This figure was identified as the lowest amount of cash for six years and followed persistent equity withdrawal since 1998.
However, this trend has been dramatically reversed by home owners with less and less taking equity out of their homes and using it to fund their spending habits. This change has got economists worried as it proves that consumers are not spending their spare cash on the high street any more.
Howard Archer, an economist at Global Insight, reasons: “Consumers are being very careful, they want to reduce their debt levels and reducing the amount they owe on their houses is one way of doing that.”
The change in behaviour could have a negative impact on the economy though as Mr Archer continued: “Consumer spending is about 65% of Britain’s income and so if consumers so not spend then it will be very hard for the economy to see decent growth. You are relying on experts and business investment to fuel growth.”
It is thought that the poor returns on savings are part of the reason that homeowners are now using their spare cash to pay off their debts.
The decision to keep interest rates at a record low by the Bank of England has had a knock-on effect on the monthly payments homeowners are paying back on their mortgage. These payments have reduced dramatically and now people are using any additional cash to reduce their total loan.
References:
The Bank of England
Mortgages paid off in record time
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