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?