Secured loan or mortgage equity release?

Despite all forecasts house prices are on the increase again. There was a lull in May, but indications for June are that house prices were on the march again.

Against the tide of rising house prices that has continued almost unchecked for the last ten years, Britain’s home owners has borrowed a staggering £264bn against the rising value of their homes. Is this a wise step to take?

Such borrowing, when you already own your home via a mortgage loan, but take out a further mortgage to raise some cash, is known as mortgage equity release or withdrawal.

One argument suggests that mortgage equity release is a good thing…

UK house prices continue to rise against expectations, and in June they rose again, by around 1.1%, taking the annual house price increase to an average of 11.1%. This helps us understand why mortgage equity release has become so popular.

With the average UK home currently worth around £200,000, for every 1% rise, and extra £2,000 is theoretically available in the value of your house. This ten-year rise in house prices has given homeowners the confidence to save less and spend more, as you are sitting on an asset which continues to go up in value. The situation is similar to that of the 1980s property boom.

In 2006, £50bn was withdrawn through mortgage equity release, and that represents about 6% of take-home pay. So, for every £100 of earnings, an extra home loan can put another £6 in your pocket.

Be in no doubt, though: release equity will increase your mortgage repayments, simply because you are borrowing more, never mind any increases in interest rates. But a mortgage is still the cheapest way to borrow money. The loan is automatically secured against the house, so borrowers can borrow against the value of the property to pay off other unsecured debts such as outstanding credit card bills or overdrafts.

Consolidation of loans may sound like a good idea, but doesn’t work for everyone. It actually works out to a great total repayment as the loan is over a longer period, and the apparent freeing up money enables people to spend again – which is just what they do, to give themselves even great problems.

Similarly, people considering remortgaging to release equity should be wary of the negative equity trap. House prices can go down – and they did in the early 1990s leaving many people owning more on their homes than it was worth. So, the key is to not borrow more than you can afford to – don’t borrow up to the value of the house, leave lots of leeway.

As with all borrowing, do not be tempted to overspend.

Another argument suggests that a secured loan is a better bet…

Let’s face it, we all carry some debt at some time in our lives, even if it is “only” a mortgage. Maintaining a certain level of credit is a fact of life for most people.

Recent research has shown that, despite several warnings about the subject, most of the UK population is comfortable with their borrowing levels, although many of them are concerned that they are not getting the best deal that they might get on, for example, interest rates. Given that, debt consolidation through a secured loan might be a good choice for people who to arrange their borrowing sensibly. As there are so many options for credit cards and loans in the marketplace, it is essential that people read and understand the terms and conditions of any loan agreement they have.

There is an argument against securing a loan against your home, especially if you have had trouble paying off your debts in the past. Nevertheless secured loans can offer lower interest rates than they’re already paying and help people to reduce their monthly repayments. Also, the management of money being owed back to various different suppliers can be a headache for some people, and one source of a loan would suit them much better. With the lower interest rates available, money can be freed up, although total payment over the whole period may work out more.

Secure loan consolidation of other debts can be a good alternative to those people who are unable to remortgage for whatever reason. Some may already be on a favourable mortgage rate that they would have to sacrifice if they remortgaged. Some may have to pay early redemption penalties. Some may simply not have the required level of equity in their home

A secured loan is not the best option for everyone, and a responsible lender will screen potential customers thoroughly, especially with credit scoring to make sure that they only lend to people who can comfortably afford the repayments. Choices are made every day by consumers, and taking time and effort to make the best loan choice should be no different.