Responding to news that homeowners had injected a record £8 billion into housing equity in the final quarter of 2008, debt management company Gregory Pennington stressed that this reversal of a long-term trend was due to a combination of factors, rather than any single event.
“Prior to Q2 2008,” said Melanie Taylor, Head of Corporate Relations for Gregory Pennington, “the last time we saw homeowners injecting money into housing equity was in Q2 1998, when they injected £279 million – a mere 3.5% of the amount injected in the final quarter of 2008.”
In the decade following 1998, of course, the average house price virtually tripled, which obviously enabled millions of homeowners to turn many billions of housing equity into cash. The highpoint of this occurred in Q4 of 2003, when £17 billion of equity was withdrawn – a full 8.5% of post-tax income.
A full decade of rapid price rises meant that homeowners were both willing and able to keep on withdrawing equity for some time after the house price boom came to an end in 2007: it wasn’t until the second quarter of 2008 that equity injections began to outweigh withdrawals.
“Standing at £1.8 billion in Q2, quarterly equity injection rapidly soared to the record level of £8 billion by Q4 – thanks to a falling base rate and a faltering housing market, as well as worries about the recession in general.
“Plummeting from 5% to 2% in Q4 alone, the falling base rate had two crucial effects on the way homeowners treated their mortgage debt. First of all, it helped people find new deals with lower monthly payments, and enabled people with existing tracker and SVR mortgages to overpay their mortgages without spending more than they were used to. Second, it led the banks and building societies to drop the rates they were paying on savers’ accounts. Many people looking for the best return on their ‘spare’ money realised that overpaying their mortgage would be much more valuable in the long run than putting their money in a savings account.
“Looking beyond interest rates and house prices, the recession itself has prompted a more conservative attitude, particularly among people who’ve experienced recessions in the past. The news has been full of repossessions, redundancies, ‘awful’ economic conditions – and a succession of dire predictions from a wide range of respected bodies, making it clear that things were expected to get a lot worse before they got better.”
Whatever the reasons, overpaying the mortgage can deliver various benefits: “Aside from reducing the amount of interest they’ll pay over the lifetime of the mortgage, overpayments can also shorten the actual term of the mortgage, meaning the homeowner will own the property outright sooner than initially expected. There’s also the question of reducing their mortgage debt and increasing the equity in the home, which can give homeowners access to mortgage deals with much lower interest rates – something which many will be keen to do as soon as possible, before the base rate has a chance to start rising again.”
Via EPR Network
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