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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.
About the author:
The author, Paul Foley, is a successful counselor and Webmaster
of the refinance information site
http://www.mortgagehelp4u.comThe site is dedicated to providing
information to those who need it regarding getting out of debt
by means of financial tools. Paul also runs the site
http://www.cash-sense.com/cashsense.html - make money the easy
way.