Remortgage cash 'for necessities'
Updated on 11 December 2008
Most homeowners who remortgaged while house prices were going up did not blow the cash they raised but used it for the necessities of life, according to new research.
Housing expert Prof Susan Smith said the credit crunch will now affect similar families who will not be able to use any equity in their homes to raise finance.
The Durham University expert said remortgaging was more popular than previously thought, and acted as a safety net for struggling families, rather than a way of funding big holidays or a new car.
Researchers looked at the borrowing patterns of more than 8,000 households in the UK from 2001-2005 and found that in any one year, two in five homeowners ended up with higher mortgages than in the previous year, even though they had not moved home.
Instead they had remortgaged or extended their home loan and, on average, these households borrowed an additional £5,000 to £7,500 in a given year.
Some of them tapped into as much as three quarters of their home equity in this way, they found.
Prof Smith said: "The credit crunch is a welfare disaster for struggling households who have previously relied on the option to borrow up against the value of their home.
"In the early years of this century we saw a form of self-administered welfare payment develop where homeowners cash in on their homes, in boom times - to support children, smooth over a fall in income, or meet the costs of relationship breakdown."
She added: "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 figures show that housing equity withdrawal has provided a lifeline for struggling families but the credit crunch threatens what has become a new form of self-administered welfare."
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