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Last Updated: Tuesday, 10 April 2007, 22:20 GMT 23:20 UK
Head to head: Using your house as a wallet
House prices continue to rise briskly. And since the start of the decade, UK home owners have borrowed an astonishing 264bn against the rising value of their homes.

But is this borrowing, known as mortgage equity withdrawal, a good thing? Two commentators argue the case.

JULIA DALLIMORE, PICTURE FINANCIAL

Julia Dallimore
Julia Dallimore says no one financial product suits everyone

Contrary to the negative stories associated with credit and borrowing in the UK, maintaining some level of credit is a fact of life for most people.

Our recent research shows that the vast majority of the population are in fact comfortable with their levels of borrowing.

However, many worry that they are not getting the best deal on interest rates and charges on their existing credit.

As such, credit consolidation through a secured loan is often an intelligent choice for people who want to reorganise their existing credit arrangements.

However, no financial product follows a one-size-fits-all approach, and they are designed with specific criteria and customers in mind.

Viable option

An understanding of the terms and conditions of the agreement is essential.

Some would argue that a loan secured against your home is never a good idea - and certainly not the most effective way to sort your finances.

However, there are many reasons why this can be a viable route for some.

Firstly, secured loans help homeowners to reduce their monthly credit repayments, offering lower interest rates on their existing credit.

In households with multiple credit repayments coming out on different days in the month, with varying interest rates and charges, managing money can be difficult.

For people in this situation, freeing up a significant amount of money each month and getting everything in one place is a priority.

In order to enjoy these lower payments, consumers are generally more than happy to end up paying back more over a longer period.

Consumer choice

Secondly, consolidation via a secured loan is an attractive alternative to those who may be unable to remortgage for any number of reasons.

Some people may have a favourable mortgage rate that they do not want to lose, or they would like to repay their loan over a shorter period (when compared to the typical length of a mortgage), or they simply don't have the equity.

The decision to take up a secured loan or other financial product is ultimately about consumer choice: it is one option that will be suitable for some and not for others.

Any responsible lender will have a vigorous screening process in place, credit-scoring all customers to ensure that they do not lend to people who cannot comfortably afford the repayments.

Every day we make informed choices that enable us to improve our lifestyles - a more fuel-efficient car; new electrical goods - and a financial product should be no different.

Julia Dallimore is marketing director of Picture Financial.

DAVID KUO, FOOL.CO.UK

David Kuo
David Kuo says mortgage equity withdrawal can cause problems

UK house prices jumped 10% last year, so it's no surprise that mortgage equity withdrawal has become increasingly popular in recent years.

The average UK home currently costs around 200,000.

Consequently for every 1% rise in house prices, an extra 2,000 could, in theory, be unlocked from your homes.

When house prices are rising, a feelgood factor tempts homeowners to save less and spend more.

After all, why should you bother to put any money aside if your home is rising in value unaided?

All you need to do is continue making your mortgage payments.

Bigger interest bill?

The temptation to save less and spend more during a property boom is not new.

The housing boom of the 1980s prompted many homeowners to siphon off equity from their homes.

Last year, 50bn was extracted through mortgage equity withdrawals, representing almost 6% of take-home pay.

This meant borrowers supplemented 100 of take-home pay with 6 of extra home loans to help finance their lifestyles.

Of course, mortgage equity withdrawal is one of the cheapest ways to borrow money.

The loan is secured, allowing homeowners to borrow against the value of their property to repay more expensive unsecured debts such as overdrafts and credit card bills.

There's nothing wrong with consolidating your loans in principle, but it rarely works in practice.

Firstly, these debts are repaid over a much longer period, which means a bigger interest bill in the end.

Secondly, consolidating a number of small loans means that you are free to restart spending on your credit cards - and many do!

Negative equity

Another thing to consider is a fall in house prices.

It happened in the early 1990s, when many homeowners found a market downturn tipped them into negative equity.

This is where your home is worth less than the loans secured against it.

Mortgage equity withdrawal is often touted as an easy way of unlocking money from your home to support extravagant lifestyles.

But it is nothing more than a sophisticated debt that allows banks to help themselves to your home, brick by brick.

What's more, they will charge you for taking away the bricks too!

Mortgage equity withdrawal is not a panacea for overspending.

For many consumers, it can cause more problems than provide solutions.

So if no one will give you an unsecured loan, sit down and ask yourself why!

David Kuo is head of personal finance at Fool.co.uk

The opinions expressed are those of the authors and are not held by the BBC unless specifically stated. The material is for general information only and does not constitute investment, tax, legal or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.

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