New research has revealed that it could in fact be cheaper to take out a short-term loan rather than to remortgage.
Data from uSwitch shows that half a million homeowners remortgage to pay off their debts.
Despite two-thirds of homeowners seeing equity release as a cheap way to borrow money, it could actually cost homeowners more in interest than taking out a shorter loan.
For example, borrowing £20,000 at 3% APR would incur £1,562 in interest over five years. This figure would go up to a staggering £4,858 if you were to add it to a mortgage on a similar interest rate with 15 years left to run.
Homeowners dipping into their property seems unlikely to go away any time soon, with two-fifths (42%) saying they are likely to release equity in the next two years.
For two-thirds (66%) of homeowners this means their monthly mortgage repayments increase on average by 24% – equating to £179 per month on the typical UK mortgage.
In London, where monthly mortgage repayments are an estimated £3,377, this would add an extra £810 each month.
Over half (55%) of homeowners are using the cash to fund home improvements and a third (37%) are consolidating debts and paying off credit cards. Another fifth (21%) say they are dipping into their homes to financially support their family, paying for childcare, care home costs and university fees.
Two-fifths (40%) are choosing this form of borrowing so that they can spread the cost of the loan over a longer period of time and help keep their monthly repayments affordable. With mortgage rates dipping as low as 0.99% in recent years, three in five homeowners (60%) incorrectly believe this is the cheapest form of borrowing.
Even though borrowing over a longer period costs more in interest over the life of the loan, the research reveals almost half of homeowners (48%) are extending their mortgage term to accommodate it.
Thomas Lyon, money expert at uSwitch.com, said: “Large numbers of people are using their homes as piggy banks, but many may not understand the implications of doing so. While record low interest rates on mortgages may be enticing, taking longer to pay off the debt will cost you more in the long run.
“It’s important consumers understand the difference between taking out a loan and extending your mortgage. It is worth assessing all your options – low interest rates across many types of borrowing mean that it is worth exploring the most cost effective route before making any decisions.
“As with all forms of credit, you should also make sure you can cope with the monthly repayments set out by the lender. If you find yourself falling behind, speak to your provider or seek help from a debt charity like StepChange.”
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