Britons borrow against their homes to the tune of ?7bn

British households have capitalised on soaring property prices and low interest rates to stack up a record debt against their homes, it emerged yesterday.

Mortgage equity withdrawal - where homeowners borrow against the the rise in the price of their home since they bought it - reached £7bn in the third quarter of last year, higher than during the Lawson boom of the 1980s, according to figures from the Bank of England.

"As in the late 1980s, rising house prices have provided home owners with the opportunity to extract capital," said Simon Rubinsohn, of City brokers Gerrard. "This factor has, however, been compounded over the past 12 months by the sharp drop in mortgage rates which has triggered a wave of refinancing on more advantageous terms."

Property prices in the UK continued to soar last year despite the downturn in the global economy, jumping by an average of 15.5%, according to the Halifax, Britain's biggest mortgage lender.

The Bank of England made seven interest rate cuts during the year to insulate the UK from the deteriorating economic climate, and householders have taken advantage of historically low borrowing costs to finance extra spending with the rise in the value of their property.

The rapid jump in equity withdrawal will raise fears that homeowners will be left high and dry if interest rates rise quickly this year. The Bank's monetary policy committee left rates unchanged on Thursday, but Sir Eddie George, its governor, warned in an interview last week that they may have to rise if the strength of consumer demand does not abate.

Despite the recession in the manufacturing sector, and the shake-out in the labour market since September 11, spending has held up in recent months, delivering retailers their best Christmas for a decade, and suggesting borrowing will continue to rise in 2002.

Danny Gabay, of JP Morgan, said homeowners could face a shock in the months ahead. "The people induced to borrow at 4% but not at 5% are typically those who can least afford it," he said. "The Bank will have to raise rates to slow down consumer demand, and no other central bank has ever achieved the fabled 'soft landing'. It's going to be a very tricky task, but the sooner they begin, the better."

However, Jonathan Loynes, of Capital Economics, argued yesterday that with few inflationary pressures in the pipeline, it is too early for borrowing costs to be increased, despite the rate at which households are piling up fresh debt. "If policymakers start threatening rises in rates, consumers may abandon them just when the economy still needs them to keep spending."