Figures from the Bank of England have shown that homeowners in the UK made a record repayment of their mortgage debts in the last quarter of 2008. The huge debt settlement does not come as a huge surprise given the number and size of interest rates cuts effectively made by the BoE. The rate cuts, from 5 per cent in August to an all time low of 0.5 per cent currently, were saluted on each occasion by controversies.

Controversy

While the BoE's wisdom in taking such steps, repeatedly, was to enable borrowers struggling with home loans cope as the credit crunch deepened, some analysts were wont to argue that it would lead to an era of free mortgage.

Banks and building societies, unhappy with the cuts, warned that they would be forced at some point to refuse to pass on the rate cuts. In any case they often had to be persuaded to pass on the cuts to borrowers while many remained adamant that they would not.

An issue that was to come up during the continued intervention by the Apex bank was that of a certain clause that would make it impossible for some borrowers to benefit from interest rates cuts. Referred to as ‘collar’, it is included in the terms of some mortgage contracts and once drew a warning from the Financial Services Authority (FSA) that unless borrowers were told about it before signing up it would be rendered invalid.  Nonetheless, the controversy raged.

Negative equity

As one of the cuts was expected shortly before the Christmas break last year, some analysts wondered whether some homeowners would not see it a ‘carte blanche’ to proceed on spending spree. Then, as now, the economic prospect looked quite gloomy, job losses were mounting, people were reeling under the burden of huge debts as they struggled to pay bills and many homes were facing repossession threats.

Surprise prudence

But one of the major benefits of the cuts was that it would result in a negative equity for some mortgage holders. Particularly those on tracker mortgages were expected to gain immensely. However, not many of them were expected to demonstrate the kind of prudence revealed by the BoE statistics.

Rather than heavily spending to enjoy a ‘nice and easy’ life briefly and postpone the doomsday, many thought it wise to use the equity withdrawal to fund mortgage debt repayment. These wise borrowers were described by an expert as the 40 per cent who took out tracker mortgages two years ago and have benefitted fully from declining bank rates. While falling house prices in the context of the cuts favoured and armed them with extra cash to spend on goods and services, they chose to pay off their capital. And collectively they paid off a huge £8 billion of mortgage debt.

Even as some analysts are commending this decision, it is hoped that many others would follow suit by taking advantage of the unparalleled opportunity to reduce their debt worries. The temptation to resort to big spending and run up more debt is real, but resisting it is equally realistic and wise.

In the meantime, all eyes would be on borrowers to see how much more of the benefits they would be able to reap while they can. Those in doubt of how best they could make use of rate cuts to turn their fortune around may need to consult experts for some help. This little help could go a long way in charting a new course.