Consumer spending took a huge blow yesterday as it was revealed that Britain’s had paid back a record £7billion in the last quarter of last year, according to Bank of England figures.
With house prices rising over the last ten years, Britain’s were withdrawing equity from their increased home values, which they then used to buy expensive luxuries, like a new car, kitchen or home improvement.
This money helped the economy grow as consumer spending was up. The credit crunch, and subsequent slowdown of the housing market has stopped customers from doing this as their houses are no longer increasing in value, leaving them with no extra equity to release.
Interest rates have also dropped, leaving savers with two options. Either leave their money in a low interest savings account or ISA, or pay money off their mortgages, which will often cost them more in interest than they would ever receive from a savings account.
The last quarter’s figures show that a huge majority chose to pay money off their mortgages, which will affect consumer spending as they choose to service debts rather than spend.
The figures are in stark contrast to just eight years ago when mortgage debt increase by £17.1billion in just three months. With debt now dropping in every quarter since the beginning of April 2008, it looks like borrowers are repaying their debts, but David Newnes of LSL Porperty Services argues this doesn’t show the full picture.
“But that’s not the full picture, it’s not just because lenders were deluged with repayments from an army of prudent borrowers,” he said.
“The overriding reason is lenders’ fears about the state of the economy, which have made them nervous about doling out mortgage finance.”