Will you be cutting your spending to focus on your mortgage?
October 21, 2008
Over the past ten years the UK has gone through a housing boom, and this has seen some lucky homeowners see their property prices rocket. Many have been delighted to see just how much their equity levels have increased as a result of soaring property prices, and this has made it possible for many homeowners to borrow large sums of money secured against the high levels of equity in their homes.
Secured loans have become increasingly popular over recent years, as homeowners have realised that they can make the most of their rising equity by borrowing money to fund purchases ranging from luxury holidays and new cars to funding an education, doing up the house, paying for a wedding, and much more. Borrowing against equity has not only benefited the homeowner by allowing him or her to raise the finance that they need through the equity in the home. It has also helped to keep the economy going, as the homeowner will obviously spend the money that is borrowed.
However, over the past year all of this has changed, and it has been clearly reflected by the slump in the economy, which many say is now headed for recession. House prices have been falling month on month for almost a year now, and homeowners are unable or unwilling to borrow against their homes for a number of reasons.
One reason is that continuing falls in property prices could result in negative equity if they borrow against the home. Another is that many lenders are now more reluctant to lend because of the effects of the global credit crunch. And finally, consumer confidence has really been knocked as a result of falling house prices and tighter credit conditions. All of this has resulted in many homeowners now focusing more on paying their mortgage than on borrowing money and spending.
One economist recently stated: “Higher mortgage rates, markedly tighter credit conditions and falling house prices have increasingly reduced the attractiveness of, and scope for, housing equity withdrawal. This reinforces our belief that we are in for an extended period of serious consumer retrenchment.”
An official from the Royal Institute of Chartered Surveyors said: “Equity withdrawal turning 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. This has contributed to consumer spending falling in the second quarter and we expect this trend to continue for some time to come.”
Speaking just prior to the Monetary Policy Committee meeting for October he added: “Against an increasingly gloomy economic backdrop there is a strong case for the Bank of England to take decisive action and cut interest rates at next week’s meeting.
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