Re-mortgaging - short-term solution or long-term problem

[CN624]

Just like to air a few points regarding the issue of property being remortgaged to pay of debts and see what you guys think.

Case Study.
(figures are estimates)
Couple in their late twenties, bought a home a couple of years ago for 250,000 euro.
House now valued at 450,000. Mortgage payment 1,332.
Combined salaries 70,000 euro. No assets apart from the house.

When they bought the house they were relatively debt free. But in the last few years they have gotten caught up in the competitive consumption culture with their peers. The house is kitted out in the best-of-the-best (or the tackiest, depending on your taste) flat screen tvs, 4k fridge, colour coded designer wooden spoons etc etc.

In the meantime spending on social life and holidays has also increased.
After a mutual friend bought a new car within a few weeks they had done the same. All of this is being financed on credit and motivated by a desire to be seen to be 'affluent'. In the past few months the overdraft limit was being hit within a week or two of being paid. And the credit card debt was being maxed to get them through to the next pay check.

They have recently remortgaged to release some of the equity built up in their property. Sensibly they used part of the lump sum to pay-off some of their debts. Having a chat with them they now consider themselves 'debt-free'. However when I got into the detail they haven't altered their consumption pattern at all. Their outgoings are the same but their monthly mortgage payment has now increased by 500 euro.
Their previously negative cash flow is down an extra 500 a month so they are now dipping into the balance of the equity released. They actually hadn't considered that re-mortgaging would increase their indebtedness, all they saw was the big lump sum.

When I tried to tell them that they were just burning cash their view was if
they got into trouble they could just release more equity.

They are planning on starting a family soon as well so the pressure on cash flow will only increase. And if there is a downturn in the property market and the well runs dry what happens then?

I'm just wondering if people realise that releasing equity from their home has a cost and if it is common for people to use equity release as a means to fund day-to-day expenditure?


Any thoughts?

 

[CmTaz]

Remortgaging is indeed in this case a short term solution if you assume that there were no payments being made on the debt in question. You mentioned that they used some of the lump sum to pay off this so perhaps there was more than €500 in payments servicing the debt. It goes without saying though that their lifestyle is what is crippling them and should be toned down to avoid further hassles.

I will give you what I feel is a long term plan / reason for remortgaging. Myself and my wife have 2 decent jobs with combined salaries approaching 80k. We had 2 car loans and a 300k healthy mortgage to pay off each month which we could do comfortably. Then along comes a child and everything changes Maternity benefit is a disgrace in this situation and it would cost us approx 10k in lost earnings. We simply could not afford for my wife to give up work after nor could we justify paying 1000 a month for childcare etc which would mean my wife working a full weeks work for about 500 a month when you factor in tax benefits of me taking her credits etc. We made the decision to top up our mortgage / pay off the 2 car loans and have enough money in the bank to last 5 years of my wife raising the child. We feel that this is money well spent and means the best possible start for our child. I have 5 years to get promoted in work which in fairness should happen within 2 and even if I dont she can go back to work part time around school hours to bring money in. Assuming the promotion happens we will be in a position to pay extra off the mortgage and the top up will not incur interest over the lifetime of the loan. Even if it turns out that way I am happy with the way the funds were spent.

That's IMHO a legitimate reasont to remortgage as a balance to your friends somewhat reckless one.

 

[woods]

Any thoughts?

Yes. It is sad but they are big boys and girl and are making their own bed so will have to lay on it.
They can not be that stupid that they do not realise that the piper will have to be paid at sometime.
I guess that there will always be people like them around.
I think that it was Getty that said that if you took all the money in the world and divided it up equally among all the people in the world it would not be long before it was all back where it started.
There will always be savers and there will always be spenders and your friends are spenders. Learn from their mistakes.

 

[Duplex]

The semantics surrounding secured lending are key to understanding the allure of this form of debt. 'Equity release', 'Re-mortgage' and 'consolidation'. These terms sound far better than, 'get into debt' or 'borrow to fund lifestyle'. I get the impression that many people believe that the 'equity' in their home is as good as money in their pockets and that a rising market will continue to generate easy money in perpetuity.

You have to wonder what would happen in Ireland if house price inflation fell to low single digits, how would people fund their lives and what would happen in all those new shopping centers?

 

[beattie]

I have thought that this situation would be quite common in todays Ireland and the crunch would come when couples start to contemplate having kids. Will couples put off having kids and/or will our birthrate drop which will excercise minds I'm sure. Remember as well as this re-mortaging is be done at a time when interest rates are at a record low

 

[d53]

Duplex put his/her finger on it: many people think equity release is a way to access some of the growth in the value of your home, but obviously it is only another way to borrow. Borrowing as a means of reducing debt is not usually very effective. OK, there will be some savings because mortgage rates are lower than credit card rates, but it won't change your life.

d

 

[CN624]

Another factor to consider is that most commentators think that those most at risk of negative equity in a property turndown are those that purchased most recently. Those that purchased a number of years ago should be insulated is the common theme.

Do they consider the number of home owners that bought several years ago and have started to release equity from their homes thus reducing the margin between debt and equity?

And what about those that bought decades ago for peanuts (in todays' terms) that are now remortgaging to fund lifestyle loans.

My personal belief is that it won't be a external property crash that will cause our house prices to fall but rather a rise in unemployment due to our lack of competitiveness. As inflation continues to increase jobs will move offshore and with the level of debts many Irish families are carrying the loss of one job in a household, even temporarily, could tip them over the edge.