Repayment of Mortgages

The housing market is very cyclical. It is not just prices that can be volatile, but also equity withdrawal and debt repayment.

mortgage

In the boom years, property owners were taking £50bn of equity withdrawal every year. Mortgage equity withdrawal was adding nearly 9% of consumers spending power. Mortgage equity withdrawal involved re-mortgaging house to gain a bigger loan that could be spent on other items. In the boom years, banks weren’t fussy about what you planned to spend your money on. With rising house prices, re-mortgaging seemed a one way bet.

However, since the credit crunch, equity withdrawal has dried up; instead homeowners are seeking to repay mortgage debt at one of the fastest rates on record.

This year, total debt repayment has totalled £24bn, which is a significant contribution to reducing household mortgage debt. The Bank of England state that households are spending nearly 2.7% of their disposable income on debt repayment.

Reasons for Repayment of Debt

  • Interest rates very low on savings
  • Prospect of interest rate increases in the future.
  • Banks much stricter about lending more on a re-mortgage. They are requiring people to prove they would spend the money on home improvements
  • Fall in house prices have left people with negative equity. Also there is potential for future decreases in house prices, therefore it makes sense to to reduce mortgage debt.

The % of income devoted to repaying debt is even more remarkable given that we are going through a period of falling real wages. With high inflation and stagnant wage growth, household spending is being squeezed and this is encouraging people to move to inferior goods. However, debt repayment is still a big priority.

Related

Housing equity withdrawal

5 Responses to Repayment of Mortgages

  1. TaxTeddy April 21, 2011 at 7:30 am #

    An interesting point although the idea of consumers paying off their mortgages is a little misleading.

    I don’t think mortgage holders are paying off any more than in the past – the difference is the new lending has dried up. So the net effect is that, overall, debt is being paid off.

  2. Real Estate Attorney Miami Beach May 18, 2011 at 11:46 am #

    Your mortgage debt is divided into capital repayments and interest payments. As you pay off your mortgage every month you are paying off a bit of capital and a bit of interest until the full debt is repaid.

  3. SheerriWells August 16, 2013 at 9:48 am #

    A repayment mortgage is a term generally used in the UK to describe a mortgage in which the monthly repayments consist of repaying the capital amount …

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