£4Bn of mortgage debt was repaid in Q4 2009 but the trend is slowing

Home owners pumped £4bn of equity into their homes in Q4 2009, as low interest rates prompted them to pay off mortgage debt early.

Latest figures from the Bank of England show that £4bn was deposited between October and December 2009 – the seventh quarter in a row in which the amount home owners unlocked from their properties was negative.

But this compares with the £5.1bn that individuals paid off in Q3 2009, marking the fourth consecutive quarterly slowdown in the rate at which home owners are paying off mortgage debt. They paid off some £2.5bn during Q2 2009 and £7.1bn in Q1.

The level of repayments peaked in Q4 2008 when individuals injected £7.11bn into their properties, representing 3% of post-tax income, compared with only 1.6% of their post-tax income in Q4 2009.

Catherine Penman, head of property consultancy Carter Jonas, says making overpayments on mortgages may not be the best way of helping the economy,

She says: “While this is a positive development for the property market, either helping home owners out of negative equity or enabling them to secure better rates at lower LTVs, there are obvious ramifications for the economy as a whole.

“Clearly, the more that is spent on paying down mortgages the less can be spent on the high street, which is essential to the recovery of the economy.”

She adds: “In the short term debt paydown is restraining property transaction levels although the fact that conservative spending is a priority for households is no bad thing given the profligacy of the past decade.”

Lloyds Banking Group recently said it will allow customers with variable rate mortgages to overpay by up to 20% with no financial penalty until March 31 2011.

Coventry Building Society has also recently launched a fixed rate deal that allows borrowers to make as many overpayments as they like without incurring a penalty.