Equity release no longer a favourable way to raise additional funds
Article source: www.jstfinancial.co.uk
Homeowners in the UK are no longer using house equity release to raise extra money to spend on home improvement projects or other major spending. This is based on figures made public by the Bank of England.
UK homeowners, as a collective, preferred to clear more of their mortgages debts, explaining why for the first time in ten years the Bank of England’s figures for housing equity withdrawal were negative. This is to say that there has been a shift away from using equity release as a means of generating cash; homeowners are now on the large preferring to put as much cash back into their house as possible to increase their equity.
In the second quarter of this year, household equity release withered out with households adding £2.8 billion of equity to their homes, which is seen as the first negative withdrawal figures since 1998. Factors such as falling house prices and sky-rocketing mortgage lending rates have helped to instigate the inflow of money. This simply means to release equity from a house for a home improvement project for example is now longer viable, as equity release really relies on a rising market.
The current blow felt as a result of the credit crunch has in its part also made it harder for equity release plans to be used as mortgage lenders have brought in tighter lending criteria; these changes have even affected existing customers and prevented them from releasing equity on their houses. In this current economic situation homeowners are becoming increasing cautious when it comes to increasing their debts; this is largely over worries about how secure their jobs are in the current climate.
In shedding more light on this issue Global Insight chief economist, Howard Archer stipulates that the decrease in withdrawals suggests a cut in the spending that homeowners are willing to make. Mr. Archer said that negative housing equity withdrawal adds to the increasing pressure on consumer spending already coming from modest disposable income, growth, rising utility bills, higher cost of food, stringent lending conditions, higher mortgage lending rate, increased debt levels, and rigid (yet currently rising) unemployment figures.
‘This reinforces the belief that we are in for an extended period of serious consumer retrenchment,’ adds Archer.
According to a comment made by Simon Robinson, chief economist at the Royal Institution of Chartered surveyors, the fact that house equity release has reduced for the first time since the late 1990s clearly indicates that the recession in the housing market is reducing access to equity that has built up in property over the last few years.
For consumers who unsure of what steps to take in order to avoid the worst blow of the credit crunch, the Treasury Spokesman for the Liberal Democrats Vince Cable offers some words of caution: ‘I would warn them that no investment, including property rises forever. I would discourage people from conventional safe havens like gold and cash under the bed since that degree of panic is unnecessary and produces no income.’
A number of financial gurus stipulate that the repayment of debt should take precedence in such tumultuous times. One of the first steps a consumer should take is to review their finances, make every effort they can to reduce their spending and then look at other options like debt consolidation.
A financial consultant from the Moneysavingexpert.com website, Martin Lewis advises consumers adversely affected by inflation to take one day and systematically take a keen look at their finances, since many people are waiting over 20% of their income of products.
Andrew Verity from the Radio 5 programme ‘Wake Up to Money’, simply advices the consumers to pay off their debts as it is among the few investments that are totally tax free and offers a guaranteed return.
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