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.
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.
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."
10 things that add value to homes in an area
10 things that add value to homes in an area
A view out over the park isn’t just a nice bonus, it’s a valuable asset. A study by Marsh & Parsons has found that a park view can add up to 10% to a property's asking price.
It carried out its research in London, where it found that a view over Warwick Square in Pimlico added £75,000 to the asking price of a one-bedroom apartment.
Understandably, this is largely a London phenomenon, where the vast majority of train-based commuting takes place in the UK.
The Nationwide Building Society found that being 500m from a station would add 10.5% to the value of a property in London. In Manchester it fetched a 4.6% premium and in Glasgow 6%.
The researchers found that the closer the property was, the higher the premium would be - until the proximity of the station started having an impact on the area itself.
Having a Tesco, Sainsburys, Waitrose, Marks and Spencer or the Co-operative within striking difference, will add value to your property. In fact, a survey by Lloyds claimed that it would add 7% - or just over £15,000.
However, apparently what we all really want is a Waitrose, because the same study found that having a branch nearby added almost £39,000 - or 12% to the value of the property.
The way the survey was carried out, however, doesn't make it clear whether this is a reflection of the attraction of the supermarket itself, or whether the supermarkets tend to target affluent areas with expensive houses.
People will pay 12% more to live in a market town than they will for the same property in the surrounding countryside. The findings come from Lloyds Bank, which claimed the towns offered a balance between country life and community spirit that proved irresistible to buyers.
It added that in some market towns the mark-up was even larger, with Beaconsfield in the South East attracting a 156% premium over the surrounding area.
A study by the London School of Economics found that living in a conservation area adds 23% to the value of your home. Given that this was an academic study, the researchers went even further and adjusted the results based on the kinds of properties in the area, and other aspects of the location (which none of the other studies took into consideration), and it still found an uplift of 9%.
Being near a good school will add 28% to the value of your home - according to Savills - with parents calculating that it’s cheaper to move into the catchment area of a good school and pay anything up to £100,000 more for their property than fork out for years of extortionate private education.
A study a few years ago by Zoopla discovered that living on a road with ‘Hill’ or ‘Lane’ in its name meant your property was likely to be 50% more valuable than the national average.
Those with ‘Mews’, ‘Park’ and 'Green’ in their names were also more valuable.
It’s unlikely that there’s any element of cause and effect here: instead they are by-products of the same thing. Expensive houses have always been built in the more exclusive parts of town, including the hills and the quiet ‘lanes’ around those hills.
A survey by Primelocation claimed that being near a top golf course would add 56% to the value of your property. It added that prices were also rising faster near golf courses than elsewhere in the country.
Of course, there’s a chance that the results were impacted by the fact that many of the courses are in leafy and exclusive areas, where people pay a premium to live regardless of the course.
You’d have thought the threat of flooding would make people take to the hills, but it appears we’re still happy to pay a premium to be beside the sea.
The Knight Frank Waterfront Index found that overlooking an estuary adds an average of 85% to the price of a property, a harbour adds 83%, while the coastline in general adds 56% to the value of the property. If you have a mooring, that’s even better, as it adds 104% to the value of your home.
Despite all the bad press surrounding flood plains and rivers breaking their banks, being near a river is actually more valuable than being by the sea.
The Knight Frank Waterside Index claims it adds 57% to the value of your property - making it the most valuable asset to have in the neighbourhood.