Remortgaging makes debt problems even worse

Using your home as a piggy bank wastes thousands of pounds, and could compound a debt problem

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Using your home as a piggy bank

Properties have become piggy banks, as we increasingly dip into the equity in our homes. A new study has revealed that a third of homeowners who have remortgaged in the past five years have done so to free up cash - borrowing an average of £43,918 more. The study, by uSwitch.com, found that a third of people were using a remortgage to consolidate existing debts - which should ring alarm bells.

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Some 60% of them said it was the cheapest way to borrow money, because interest rates on mortgages are currently so low. And given how house prices have risen over the years, homeowners are confident that they can continue to dip into their equity, and prices will keep rising to make up for it.

However, this could be an expensive mistake.

More expensive

If you have to borrow money, then it is usually far cheaper to borrow for as short a time as you can afford, because the interest has less time to add up. Mortgages, by contrast, could easily be spread over a decade or more. Thomas Lyon, money expert at uSwitch.com, says: "Large numbers of people are using their homes as piggy banks, but many may not understand the implications of doing so. While record low interest rates on mortgages may be enticing, taking longer to pay off the debt will cost you more in the long run."

So, for example, borrowing £20,000 at 3% APR would incur £1,562 in interest over five years but a staggering £4,858 if you were to add it to a mortgage on a similar interest rate with 15 years left to run.

The sums are also predicated on interest rates remaining at record lows. This is far from guaranteed when there's a decade or more left to run on the mortgage. Rising rates could suddenly make your mortgage far less affordable

In addition, if you withdraw too much equity from your home, it could leave you exposed to negative equity if property prices fall back.

If they are repaying debts, it could be even riskier

These aren't the only risk when you are remortgaging to pay off debt. Before you go anywhere near debt consolidation, you need to ask some serious questions. Consider how you are creating these debts in the first place, and why you are not able to live within your means. Have you been particularly unlucky, or do you really need to make some major changes to your lifestyle if you are going to avoid spending more than you earn?

Ask yourself what is going to change in your life so that this remortgage solves your problems once and for all - rather than finding yourself in the same position again a few years down the track.

If you don't do this, then you are simply putting off the problem, and will end up dipping into the value of the property over and over again - until you get to a stage where you cannot afford repayments, the mortgage company doesn't allow you to take any more, or you hit negative equity.

If you need to borrow money, and you can establish that won't just precipitate yet more spending and borrowing, then the next question is whether a remortgage is the best approach. Lyon says: "It's important consumers understand the difference between taking out a loan and extending your mortgage. It is worth assessing all your options – low interest rates across many types of borrowing mean that it is worth exploring the most cost effective route before making any decisions."

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