UK homeowners have slowly but surely been paying down increasing amounts of their mortgages over the 18 month period of the pandemic lockdown.
Mortgage Debt - REPORTS
Several recent reports and studies have been showing that those who could afford to pay a little extra off their mortgages, have been paying down their debt as opposed to saving cash.
Those who have been lucky enough to continue working at 100% of salary throughout the pandemic, have benefited from the considerable reduction in costs by not travelling as much, and by not being able to go to restaurants, cinemas, pubs and clubs.
This group were able to save considerable sums each month and have put that towards their mortgage overpayments.
Even those who were furloughed and still received 100% of their salary have taken the decision to pay off some of their mortgage as well as save some spare money for emergencies.
They have been receiving a full salary, and a little more on the side in some instances, but again with the severely reduced recreational spending they have maintained a net positive balance per month, and used any spare to pay off their debt.
There are even some instances where those on furlough and only receiving 80% of their usual full time pay have still been able to be net cash positive, as the difference in 20% gross earnings has been more than taken care of by the reduced cost of the discretional spending, again meaning they have been able to pay down some mortgage debt.
A recent report in the Guardian even demonstrated that the total net repayment for mortgage debt during July 2021 exceeded new mortgage approvals debt, as UK homeowners continued to pay off their mortgages after the stamp duty holiday expired at the end of June.
The Bank of England said individuals collectively paid back £1.4bn more of mortgage debt than they borrowed, in the first net repayment since the housing market ground to a halt during the first wave of Covid-19 in April 2020.
This was noted as being only the second net mortgage repayment in about a decade.
Up until 30 June, the first £500,000 spent on a property was tax-free, which meant a saving for a buyer of up to £15,000. On 1 July, the tax break was scaled back, with the threshold at which the tax on property purchases begins falling to £250,000.
This so-called “nil rate band” has returned to its pre pandemic level of £125,000 on 1 October 2021.
INFLATION and Mortgage Debt
With rising inflation now well established in the UK and the next increase in the Bank of England's base rate a matter of when, and not if, the paying down of individuals mortgage debt was probably a sensible action to take in hindsight.
CPI inflation is currently 3.1% with RPI around 5%. Commentators expect CPI to reach 5% during the winter of 2021, with the Bank of England likely to increase the base rate before the end of this year at least once, and potentially twice, with further increases likely in the early part of 2022.
The more mortgage debt paid off by households during the last 12 to 18 months, the cheaper their mortgages will become, and can also shave several years off the overall duration of the loan.
With fixed deals at around the 1% mark coming to an end and being replaced by SVR’s of 3.5% to 4%, the new breed of fixed term mortgages is likely to be higher than those of two years ago, vindicating the decision to overpay their mortgages for many UK households and save money.