Homeowners Waste Another £8 Billion

Banking and Borrowing

04 January 2006 | 0 Comments

Could your spending habits put the roof over your head at risk? They might if you decide to borrow against your home...

According to the Bank of England, British homeowners are still borrowing against their homes to support their spending.The Bank's latest figures show that homeowners borrowed £8.3 billion against their homes between July and September last year, down from £10 billion in the previous quarter. Withdrawing part of your housing equity to spend elsewhere is known as mortgage equity withdrawal (MEW), and it can produce some nasty outcomes when it gets out of control.Alas, we Brits have borrowed a fantastic amount against our homes since the turn of the century, much of which has been splurged on having a good time. For the record, here are the MEW figures since the year 2000:YearMEW(£bn)Take-homepay (£bn) MEW as% of pay2000126601.82001217053.02002407285.52003587667.52004517966.4Year toSept 05256224.0Total2074,2764.8As you can see, MEW really took off during the house-price boom, almost doubling between 2000 and 2001, and doubling again over the following year. Indeed, in 5_ years, we've borrowed a total of £207 billion, which has boosted our take-home pay by a twentieth (5%). However, the end of double-digit house-price rises, plus higher mortgage rates, has resulted in a MEW slowdown, with 2005's total sure to be lower than any recorded over the previous three years.Given that we've been spending about £110 for every £100 of our take-home pay, this means that roughly half of our overspending has been covered by MEW. However, using your home as a means to support your spending is a dangerous game to play.What really worries me is that about three-fifths (60%) of all secured loans are used for debt consolidation, as I warned in The Dangers Of Gambling With Your Home. Look, let me be blunt for a moment: if you're struggling to make ends meet, it's virtually financial suicide to turn your unsecured debts into a loan secured against your home. Get it wrong and you could lose your home, especially if you go to one of the credit brokers which constantly advertise on daytime television!If you don't want to put your home on the line in order to fund your lifestyle, then consider the alternatives. For example, you could avoid interest for up to a year by transferring existing debts to a 0% credit card (I explained the rules of this game here). Furthermore, a Best Buy unsecured personal loan is much less risky than a secured loan, because you're unlikely to lose your home if you can't keep up the repayments. However, be warned: according to one Fool survey, five out of six people (84%) who consolidated their borrowing went on to pile up fresh debts, so beware!One final warning: your home is not a piggy bank into which you can dip when the mood takes you. It's a very valuable asset, so treat it with respect, and try to pay off your mortgage as fast as you can!More: Find better credit cards and personal loans | Check out our Get Out of Debt centre.

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