Debt consolidation mortgages – still an option?

Why have debt consolidation mortgages been so popular recently? In the last five years, homeowners have withdrawn nearly a quarter of a trillion pounds of equity* from their property. That’s almost £4 billion of equity every month.

Actually, it’s no big surprise. When house prices go up, homeowners feel wealthier, and in recent years prices have gone up a lot, making a lot of people feel a lot wealthier. After all, very few of us have £100,000 in the bank, but the ‘average house’ went up by around £100,000 in seven years just before the market peaked last year.

But that extra wealth isn’t really cash. Most homeowners don’t want to sell their home to access it, as they’d have to either go to rented accommodation or buy another home – and unless they moved to an area where prices haven’t risen so sharply, the house they’d buy would probably have gone up dramatically too.

Freeing up cash

What they can do (as long as they can afford the repayments) is make use of that equity by remortgaging or securing a loan against it. Some people do this as a way to free up spending money, while others do it to consolidate debts such as overdrafts and credit / store cards.

For anyone with substantial unsecured debts, a debt consolidation loan / mortgage can be a great way to pay them off. They could significantly reduce their monthly debt repayments (especially if they’re consolidating high-interest debts), but they could also end up paying more in the long run, as they’ll probably be repaying the debt – and paying interest on it – over a longer period of time.

Debt consodation – drawing on equity

In Q4 2003 (Oct-Dec), according to Bank of England figures, Home Equity Withdrawals (HEW) came to over £17 billion. This was a record both in terms of money and as a percentage of households’ post-tax income:

Housing Equity Withdrawal – Q4 2003

In millions of £	As % of post-tax income
17,179	8.8

In 2003, the average home was worth £119,938 in Q1 and £133,903 in Q4, according to Nationwide’s House Price Index (HPI). So the average homeowner acquired almost £14,000 of equity just by waiting a year – and debt consolidation mortgages and other forms of HEW let them access that equity.

By Q1 2008, the HEW figures had changed a lot:

Housing Equity Withdrawal – Q1 2008

In millions of £	As % of post-tax income
5,043	2.2

If house prices were flat, homeowners wouldn’t be able to acquire equity just by waiting; the amount of equity they own would only go up gradually as they paid off their mortgage. And today, house prices aren’t just flat; they’re falling. According to Nationwide’s HPI, the average home has fallen from £184,131 to £174,514 in the last year. In other words, most homeowners now have decreasing equity to draw on.

Is a debt consolidation mortgage still an option?

Today, even though lenders are more cautious about mortgages and remortgages (often asking for higher deposits and charging higher rates), millions of homeowners might still be able to consolidate their debts through a mortgage or secured loan.

After all, the fall in house prices comes after a decade of rapid price increases, so anyone who’s owned their property for a few years could still own plenty of equity. If they’re struggling to keep up with their debt repayments, they could be able to find the right debt consolidation mortgage – and use that equity to pay off their high-interest debts.

*Equity is the portion of the property that the homeowner owns outright. It’s the value of the property minus the value of any mortgages / loans secured on it.