Mortgage Equity Withdrawal is the formal name for equity refinance, reverse mortgages, or just home loans based on equity (as the security for the loan).
Mortgage Equity Withdrawal reached 8.7 billion pounds in the second quarter of this year, which was the highest level since the third quarter of last year (on Tuesday 4th Oct 2005).
Mortgage Equity Withdrawal is the amount of money that Britons have taken out of their homes but not put back into property.
In the last few years, house prices have gone up sharply, which has led to a trend of Britons refinancing their mortgages to get cash. Many economists say this has helped boost spending.
The Bank of England said that Mortgage Equity Withdrawal was up sharply from the first quarter of this year, when it was only 6.437 billion. However, it is still a long way from the 14.5 billion seen a year ago, when house prices were rising by more than 20% a year.
Since then, the Bank of England has cut interest rates by a quarter of one percent, to 4.5 percent. This could help Mortgage Equity Withdrawal in the coming months, especially since there are signs that the property market may be stabilising after a year of being flat.
Mortgage Equity Withdrawal went up from 3.2 percent of income after taxes in the first quarter of the year to 4.2 percent in the second quarter. This is a big drop from the 7.3 percent seen a year ago, though.
"Mortgage Equity Withdrawal seems to have led to both more spending and more holdings of financial assets (stocks and bonds)," said Geoffrey Dicks, an economist at RBS Financial Markets in the UK.
"In general, the rise in Mortgage Equity Withdrawal is probably a sign that the housing market is "normalising" more. However, since the money is saved instead of spent, the policy implications aren't that big."
The number of people who saved money in the second quarter of this year went up from 4.5 percent in the first quarter to 5 percent in the second quarter (also of this year).
Separate data showed that residential construction in the UK barely grew in September. This was the worst performance for a single month since May.
But what exactly does this mean?
This sentence makes a few important points, which are:
- People are refinancing because the value of their homes has gone up.
- People don't always spend money on the high street.
- The money isn't always being spent on the property.
We all care about these three things, not just the people who make policy. This is why.
Let's look at the first point: people are refinancing because the value of their homes has gone up quickly.
This sentence tells us that the housing market is still going up, even though it isn't going through the roof like it was a few years ago.
The second point tells us that when people actually take out this money, they don't use it to make improvements to the home. This means that the home's equity won't grow faster than the market rate.
The third point is perhaps the most telling. People aren't taking the money and spending it randomly. Instead, they may be saving it (bonds, shares, bank accounts).
So, what does this mean?
Well, you could say it's a bit of a mixed message.
The average person (those who own property) is getting deeper and deeper into debt. If you refinance your mortgage or "free up equity," as real estate agents say, you are borrowing money, unless it's a reverse mortgage.
People who refinance don't use the money to improve the property, so if the market goes down, their property will lose as much value as the next one. If they had put some of the money back into improvements, however, their property would have lost less value.
The last bad sign is that people are saving more, which is also not a good sign. In a healthy economy, people don't save much money because they are confident (they don't worry about paying their bills or losing their jobs). However, more people are starting to save money instead of spending it, which will hurt the retail sector and put low-paying jobs at risk. This has a ripple effect on the service sector and creates a vicious circle that will eventually cause the market to stop growing.
But this trend shows that you might be able to get more money back in interest on savings than you pay out in interest on refinancing. So right now, the smart money in equity is to refinance.
