Homeowners racked up ?7bn in debt at end of 2001

Britain's homeowners took advantage of soaring property prices and low interest rates to stack up a record £7bn of debt against the value of their homes in the last three months of 2001, official figures showed yesterday.

Mortgage equity withdrawal - which allows borrowers to cash in on the rise in the value of their home since they bought it - hit its highest ever total, at £7bn, in the fourth quarter of last year, according to the Bank of England.

Analysts said that with the property market remaining buoyant, and interest rates at a 38-year low, it was not surprising consumers had gone on a borrowing spree.

"As in the late 1980s, rising house prices have provided homeowners with the opportunity to extract capital," said Simon Rubinsohn, of City broker Gerrard. "This has been compounded by the sharp drop in mortgage rates, which has triggered a wave of refinancing on more advantageous terms."

Nevertheless, confirmation that homeowners were still rushing further into debt in the last quarter of 2001 as the economy ground to a halt led some analysts to warn yesterday that the Bank of England's Monetary Policy Committee would have to raise interest rates in the coming months to bring the borrowing binge to an end.

News from the Nationwide and Halifax this week that house prices are still increasing suggests equity withdrawal could remain strong into 2002.

"This, more than anything else, underlines the need for a restraining hand - neither borrowing nor consumption is showing any signs of decelerating of its own accord as the MPC had hoped it would," said Danny Gabay of JP Morgan.

The Bank chose to leave interest rates on hold at 4% for the fifth consecutive month on Thursday, after cutting them seven times last year to stave off recession. Its governor, Sir Eddie George, has repeatedly raised concerns about the increase in household indebtedness, which the MPC fears could make any rise in rates more painful for homeowners.

However, the breakdown of the Bank's figures yesterday showed that mortgage equity withdrawal as a proportion of income, at 4%, is still much lower than the 8.5% reached at the height of the late 1980s property boom.