Equity withdrawal gallops ahead

Households are borrowing record amounts of cash against the value of their homes to finance the biggest spending binge since the end of the 1980s, according to figures yesterday from the British Bankers' Association.

Only half of last month's £13.1bn in mortgage lending was used for house purchases, said the BBA. The rest was accounted for by remortgaging designed to take advantage of cheaper interest rates and equity withdrawal to pay for extensions, cars and consumer goods.

Equity withdrawal has galloped ahead in recent months, reaching a level where it is equivalent to everybody in the country enjoying a 6% pay rise.

BBA director Simon Pitkeathley: "Only half the amount of loans approved in September were for house purchase. It would seem that increasing numbers of homeowners are seeking out better deals on their existing loans. They may also be choosing to build that extension rather than move to a bigger property. This could be a reflection of a continuing resistance to paying the going rate for property."

Equity withdrawal peaked in the third quarter of 1988 at £6.3bn but collapsed to zero by 1993 as the property market slumped, according to Bank of England figures. It only topped the 1988 peak thirteen years later in the third quarter of 2001 at £6.9bn and is now running at a rate of around £3bn-£4bn per month, equal to 6% of national income.

But the Council of Mortgage Lenders says the boom in equity withdrawal is sustainable. "The growth has, on balance, been beneficial for the economy. It has helped sustain consumer spending at an average of 4% over the last five years."

Further evidence of the equity withdrawal boom came yesterday from the Builders Merchants Federation. Sales of building materials to private households have jumped 9% so far this year, largely financed by borrowing against equity, according BMF director Jeremy Hawksley.