Housing equity not released for debt

Most equity withdrawal occurs as a result of trading-down or last-time sales, rather than as a result of people increasing their debt by tapping into

14:54 03 September 2004

Most equity withdrawal occurs as a result of trading-down or last-time sales, rather than as a result of people increasing their debt by tapping into their housing equity, according to the Council of Mortgage Lenders (CML).

In an article in the latest issue of the CML's economics journal Housing Finance, the CML analyses data from the Survey of English Housing to show that of all equity withdrawn between 1998 and 2003, just under two-thirds was attributable to last-time sales and trading down.

Nearly a quarter was attributable to remortgaging and further advances, with the remainder (13 per cent) attributable to people moving house and borrowing more than they needed to finance the move.

Even so, remortgagers accounted for the greatest numbers of people withdrawing equity. And 69 per cent of those remortgaging between 1998 and 2003 withdrew equity, compared to only 29 per cent of movers.

But remortgagers tended to withdraw much lower sums than those withdrawing equity through other methods, with an average amount of 21,000 compared with an average 72,700 for last-time sales.

Among remortgagers who withdrew equity, the bulk (62 per cent) intended to use at least some of the money to finance home improvements (and so effectively plough it back into housing investment).

The article also points out that, despite recent high levels of equity withdrawal, households' general equity position remains strong. The average median equity level is 56,000 per household, 36 per cent of the average house value of 155,000.

The CML authors, analyst Jackie Smith and economist Jennet Vass, conclude: "As interest rates have begun to rise, we are expecting borrowers to continue to switch onto the most favourable rate available.

"However, while we expect the occurrence of serial remortgaging to increase over time, it is likely that equity withdrawal will slow.

"This will be in response to slowing house price growth and rising interest rates.

"The CML's latest forecast suggests house price growth will slow significantly over the next two years and following that there will be a period of very modest growth."