Mortgage Equity Withdrawal is the formal name for equity

refinance, reverse mortgages or simply home loans based on

equity (as the security for the loan).

Mortgage Equity Withdrawal rose to 8.7 billion pounds in the

second quarter of this year to its highest since the third

quarter last year, official data showed (on Tuesday 4th Oct

2005).

Mortgage Equity Withdrawal is a measure of the equity Britons

have extracted from their homes but which they have not

re-invested in property.

Sharply rising house prices in the last few years have

encouraged a trend where Britons refinance their mortgages to

extract cash which many economists say has helped support

spending.

The Bank of England said that Mortgage Equity Withdrawal was up

sharply from 6.437 billion in the first quarter of this year

although it is still well below the 14.5 billion seen one year

ago, when house prices were rising more than 20 percent

annually.

The Bank of England has since cut interest rates by a quarter

of 1% to 4.5 percent which could support Mortgage Equity

Withdrawal in coming months, particularly as there are signs

that the property market may be stabilizing after a year of

stagnation.

As a percentage of post-tax income, Mortgage Equity Withdrawal

rose to 4.2 percent from 3.2 percent in the first quarter of

the year but is well down on 7.3 percent seen a year ago.

" Mortgage Equity Withdrawal appears to have found its way into

increased holdings of financial assets (equities, bonds) as much

as extra spending," said Geoffrey Dicks, UK economist at RBS

Financial Markets.

"Generally the pick-up in Mortgage Equity Withdrawal is

probably indicative of more `normalization' of the housing

market but while it is saved rather than spent, the policy

implications are not huge."

Official data last month (September) showed the saving ratio

rose to 5 percent in the second quarter of this year from 4.5

percent in Q1 (also of this year).

Separate figures showed UK residential construction barely grew

in September, putting in its weakest monthly performance since

May.

But what does this mean in real terms?

There are several key points in this statement, these are:

1.People are refinancing their homes because of increased value

2.People are not necessarily spending the money on the property

3.People are not necessarily spending the money in the high

street

These three points are important to all of us, not just the

policy makers. Here’s why.

Let’s consider the first point, people are refinancing there

homes because the equity has grown rapidly.

This statement tells us that the housing market although not

sky rocketing as it was a couple of years ago, is none the less

still rising.

The second point tells us that when people effectively withdraw

this money it is not to improve the home itself, hence the

equity of the property will not grow at a better rate than

market rate.

The third point is perhaps most telling, people are not taking

the money and spending it in a hap hazard manner but are

potentially saving it (bonds, shares, bank accounts).

So what do this mean for us?

Well, it’s a bit of mixed signals heads up if you like.

The general population (property owners) are slipping into ever

increasing levels of debt (if you’re refinancing your mortgage

or ‘freeing up equity’ as the agents put it, you are

effectively borrowing money) – unless it’s a reverse mortgage.

People who are refinancing are not improving the quality of the

property with the money and so if the market takes a fall their

property will devalue as much as the next property (whereas if

they’d returned some of the capital into improvements they

would at least be sitting on a lesser slump in value).

Finally, and perhaps the most damming sign is that people are

saving more, this is not a good sign. In a healthy economy the

rate of saving is low, this is primarily because confidence is

high (people aren’t worried about the bills or their jobs) but

the fact that more people are now starting to save money rather

then spending it means that the retail sector will be taking a

hit, this means that the bottom end jobs will be in danger,

this in turn has a knock on effect in the service sector and

becomes a vicious circle – the end result being market

stagnentation .

But what this trend does illustrate quite simply is that you

can potentially get more money back in savings interest than

you pay out in refinancing interest – so at the moment the

smart moneys in equity refinance.