Mortgage Equity Withdrawal is the formal name for equity refinance,
reverse mortgages or simply home loans based on equity (as the security
for the loan).
Mortgage Equity Withdrawal rose to 8.7 billion pounds in the second
quarter of this year to its highest since the third quarter last year,
official data showed (on Tuesday 4th Oct 2005).
Mortgage Equity Withdrawal is a measure of the equity Britons have
extracted from their homes but which they have not re-invested in
property.
Sharply rising house prices in the last few years have encouraged a
trend where Britons refinance their mortgages to extract cash which
many economists say has helped support spending.
The Bank of England said that Mortgage Equity Withdrawal was up sharply
from 6.437 billion in the first quarter of this year although it is
still well below the 14.5 billion seen one year ago, when house prices
were rising more than 20 percent annually.
The Bank of England has since cut interest rates by a quarter of 1% to
4.5 percent which could support Mortgage Equity Withdrawal in coming
months, particularly as there are signs that the property market may be
stabilizing after a year of stagnation.
As a percentage of post-tax income, Mortgage Equity Withdrawal rose to
4.2 percent from 3.2 percent in the first quarter of the year but is
well down on 7.3 percent seen a year ago.
" Mortgage Equity Withdrawal appears to have found its way into
increased holdings of financial assets (equities, bonds) as much as
extra spending," said Geoffrey Dicks, UK economist at RBS Financial
Markets.
"Generally the pick-up in Mortgage Equity Withdrawal is probably
indicative of more `normalization' of the housing market but while it
is saved rather than spent, the policy implications are not huge."
Official data last month (September) showed the saving ratio rose to 5
percent in the second quarter of this year from 4.5 percent in Q1 (also
of this year).
Separate figures showed UK residential construction barely grew in
September, putting in its weakest monthly performance since May.
But what does this mean in real terms?
There are several key points in this statement, these are:
1.People are refinancing their homes because of increased value
2.People are not necessarily spending the money on the property
3.People are not necessarily spending the money in the high street
These three points are important to all of us, not just the policy makers. Here’s why.
Let’s consider the first point, people are refinancing there homes because the equity has grown rapidly.
This statement tells us that the housing market although not sky
rocketing as it was a couple of years ago, is none the less still
rising.
The second point tells us that when people effectively withdraw this
money it is not to improve the home itself, hence the equity of the
property will not grow at a better rate than market rate.
The third point is perhaps most telling, people are not taking the
money and spending it in a hap hazard manner but are potentially saving
it (bonds, shares, bank accounts).
So what do this mean for us?
Well, it’s a bit of mixed signals heads up if you like.
The general population (property owners) are slipping into ever
increasing levels of debt (if you’re refinancing your mortgage or
‘freeing up equity’ as the agents put it, you are effectively borrowing
money) – unless it’s a reverse mortgage.
People who are refinancing are not improving the quality of the
property with the money and so if the market takes a fall their
property will devalue as much as the next property (whereas if they’d
returned some of the capital into improvements they would at least be
sitting on a lesser slump in value).
Finally, and perhaps the most damming sign is that people are saving
more, this is not a good sign. In a healthy economy the rate of saving
is low, this is primarily because confidence is high (people aren’t
worried about the bills or their jobs) but the fact that more people
are now starting to save money rather then spending it means that the
retail sector will be taking a hit, this means that the bottom end jobs
will be in danger, this in turn has a knock on effect in the service
sector and becomes a vicious circle – the end result being market
stagnentation .
But what this trend does illustrate quite simply is that you can
potentially get more money back in savings interest than you pay out in
refinancing interest – so at the moment the smart moneys in equity
refinance.
