November 26, 2008
Mortgage Equity Withdrawal - The Refinancing Trend
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.
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