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Home truths about funding cars and holidays through equity withdrawal: 'We've borrowed pounds 20k for pounds 98 a month': Borrowing Taking cash from your house was huge before the credit crunch. Now it's back, says Emma Lunn. But is it wise?

May 10, 2014

Youth minister the Rev Michael Hunter, 49, lives in Hertford with his wife and three children. He recently remortgaged to both have the security of a fixed rate, and to raise money for home improvements.

He says: "I was on a lifetime tracker with Woolwich at 2.89% but I started thinking that rates might go up and we wanted the security of a fixed rate. Through London & Country we are remortgaging to a five-year fix with Santander at 2.99%, so it's a negligible difference in the rate.

"We need to get home improvements done, and friends suggested adding on money to the new loan and paying it off over the term of our mortgage.

"We got some quotes for the work and decided we didn't want our mortgage payments to go up by more than pounds 100 a month. We've stuck to that. We're getting our bathroom redone, adding a shower room and knocking down our conservatory and putting up a new one. We've borrowed an extra pounds 20,000 and our mortgage payment is going up just pounds 98 a month."

Emma Lunn

Soaring house prices and low interest rates mean homes are once again the piggy banks from which owners are releasing wads of cash.

Negative equity has almost vanished in the latest house price boom, according to estate agency Countrywide. It says that while 60% of first-time buyers who bought before 2007 found themselves by 2008 with a home worth less than the mortgage, today the number is just 6%.

Meanwhile, estate agency Haart's National Housing Market Monitor suggests that the average UK home buyer has equity worth pounds 14,000, rising to pounds 90,000 in London. Remortgaging a property to release this (often used to pay down credit card debts as well as finance spending on luxuries) was a common feature of the last housing bubble. Bank of England figures show that in 2006 pounds 35bn was taken out of homes, but that changed in 2008 as we started paying off our mortgages rather than borrowing more.

Now, with interest rates at ultra-low levels, many people are again seeing remortgaging as a cheap form of borrowing - and indeed, adding pounds 2,000 to a mortgage over 20 years at 3% will cost just pounds 11 a month. However, releasing equity from your home in this way comes with pitfalls.

Council of Mortgage Lenders figures show that of the 6.9 million borrowers who took out a mortgage since April 2005, 1.1 million have refinanced at least once and around two-thirds of those remortgaging at that time withdrew equity. However, with fears of another house price bubble in mind, is remortgaging to withdraw equity ever a good idea?

Mark Harris, chief executive of mortgage broker SPF Private Clients, has mixed feelings. "Remortgaging to repay expensive debt such as credit cards and personal loans is sensible as mortgage rates are lower than unsecured borrowing," he says. "But if you are converting short-term debt to long-term, you need to think carefully, as you could end up paying back more in the long run."

Adding pounds 10,000 to a mortgage at 3% over 20 years will see your monthly payments go up by about pounds 55, which is much cheaper than the pounds 186 a month it costs for a personal loan for the same amount, assuming a rate of 4.5% APR, paid back over five years .

But the total interest bill for each option shows that remortgaging would cost pounds 6,000 in interest over 20 years and the personal loan pounds 1,161 over five years - pounds 4,839 less.

David Hollingworth, of mortgage broker London & Country, says deciding whether or not to increase your mortgage may depend on what the money's for."The danger is that having cleared the other debts there is a temptation to slip back into old habits, and start using cards that have just been cleared," he warns. "But at the other end of the scale, increasing the mortgage to carry out improvements such as an extension or loft conversion can be a good option. This could add value to the property and avoid the need to move to a bigger home at a higher price and with all the expense of buying."

People considering remortgaging to raise cash also need to consider what will happen the next time they want to refinance. While mortgage rates are low now, they will inevitably rise.

"The best rates are still available to those with the most equity in their homes, so it's worth remembering that if you extend your mortgage it may cost you in terms of the rate you remortgage to at the end of your existing deal," warns Harris.

Those homeowners who do decide to remortgage to release cash won't find it as easy as it used to be. New rules that came into effect on 26 April mean lenders are now doing a lot more checks on borrowers' income and outgoings to ensure they can afford their mortgage both now and in the future. It's not just first-time buyers and movers affected by the new rules; those remortgaging are too.

For more stories on investments and markets, please see HispanicBusiness' Finance Channel

Source: Guardian (UK)

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