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DON'T CASH IN ON YOUR HOME; Save a fortune and go for a short-term loan.


ONCE upon a time an Englishman's home was his castle.

Then came the house price boom and for those lucky enough to have a foot on the property ladder, it became a big money-maker.

Official figures out yesterday show the equity in UK homes - the value once you've paid off the mortage - is now pounds 3.4trillion - up from pounds 1.3trillion when Labour came to power in 1997.

As a result the nation's 18 million homeowners have, on average, pounds 200,000 worth of equity. Of course, that figure is skewed by London prices and older people who have paid off their mortgages.

But the surge in house prices has left many people feeling richer and this phenomenal growth may also explain why more people see their home as a source of additional income as well as somewhere to live.

The rash of TV property programmes only serves to reinforce this idea of our homes as cash machines. But alarming Bank of England figures suggest we're making more and more withdrawals. Using our homes as collateral we borrowed an additional pounds 12.5billion in the first three months of the year, according to the Bank. It is a rising trend in so-called equity release that started at the end of last year.

It seems people are using the money to pay for anything from flat screen TVs to exotic holidays or new cars.

Instead of saving up they're "taking advantage" of low interest rates to borrow against the value of their home. The Bank of England has frozen interest rates at 4.5 per cent for almost a year now. Mortgage rates are historically low and this is funding the spending sprees of huge numbers of people. Others are being tempted by the prospect of lower monthly repayments to borrow against the house to repay other debts.

People in both camps are making a big mistake. It is a reckless move. It makes far more sense to take out a short-term loan. It may eat up a bigger slice of your spare cash each month, but you'll pay it off far quicker than if you bolt it on to a mortgage with 15 or 20 years left to run. Borrow pounds 10,000, for example, from Direct Line over four years at 5.6 per cent - one of the best rates available today - and you will pay back pounds 11,152.

What is more, you can be certain that the interest rate - and therefore the amount you repay each month - won't change.

But add that pounds 10,000 to a mortgage with 20 years to run and it will cost you more than pounds 17,083, as our table shows. Worse still, unless you have a fixed rate mortgage that could increase if interest rates rise.

Sean Gardner, chief executive of, says: "Using the cash in our homes to sort out debt problems is a seductive solution. And you can argue that it makes sense when you compare the interest rates on credit cards at around 15 per cent with mortgages.

"However there is a sting in the tail. People are forgetting that the longer they borrow for, the more they will pay in interest.

"It's great business for the mortgage lenders, but not a great deal for the borrower. For some short-term pain with a personal loan, you can clear the debt much quicker and for much less in interest."


GOLD BRICK: But don't bank on it Picture: ALAMY' LUXURIES: The equity is buying cars and TVs
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Title Annotation:Business
Publication:The Mirror (London, England)
Date:Jul 26, 2006
Previous Article:OWING IS 'OK'.

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