Homeowners use equity and remortgage for essentials

Thursday, 11 December 2008 10:01

Many struggling households have used the equity in their homes for essentials but the credit crunch is threatening this 'self-administered welfare', a study has found.

Research from Durham University found in any given year, two in five homeowners ended up with higher mortgages than in the previous year, even though they had not moved home.

On average, these households borrowed an additional £5,000 to £7,500, with some taping into as much as three-quarters of their home equity in this way.

This means mortgage equity is more popular than thought, the authors said.

In addition, borrowers have not just used their housing equity to splash out on holidays or cars; struggling households have borrowed against their homes to meet their basic needs like bringing up children.

This goes against the perception that home equity release is for luxuries, the research team said.

Durham University housing expert, Susan Smith, said: "In the early years of this century we saw a form of self-administered welfare payment develop where home-owners cash in on their homes, in boom times: to support children, smooth over a fall in income, or meet the costs of relationship breakdown.

"This suggests that the credit crunch is not just precipitating a crisis in the finance community; it could produce a crisis of welfare too.

"Without the option to use mortgages to channel housing wealth into spending money, families under pressure lose access to their most significant asset base for welfare and are forced to look at other ways of getting by."

The Durham research team - Dr Beverley Searle and Professor Susan Smith -linked up with Australia's RMIT University to research and compare the mortgage choices of UK and Australian homeowners over the same four years (2001-2005).

This was a period with rising house prices and easy credit and there are more similarities than differences in the two countries.

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