Retailers must brace themselves for further falls in consumer spending as people opt to pay down debt as they tighten their purse strings

Bank of England data shows that consumers paid off £7bn of their outstanding mortgages in the final quarter of last year, in a bid to take control of their personal finances.

A total of £24.6bn was paid off in 2010, compared with £19.6bn in 2009.

According to Singer Capital Markets analyst Matthew McEachran, the trend is a “real concern”.

“This serves to explain the severity of the drop-off in retail expenditure recently,” he said. “With low confidence and the propensity to save on the rise, this added squeeze on spending could persist in 2011, adding weight to our already cautious view.”

McEachran said if the trend to pay down debt continued this year, retailers could see a £5bn drag on sales in 2011, equivalent to a 3.3% fall in sales, assuming non-food retailers take the biggest hit.

“Retailers exposed to home or big-ticket will fare worst, but this level of squeeze could have a knock-on effect beyond just the obvious parts of the sector,” he warned.