Australians at risk of losing their homes
ALMOST one in five homeowners has dipped into the biggest savings account of all - their mortgage - with potentially disastrous results, new data shows.
Of those who used their home equity, either by redrawing or refinancing to borrow more, the most likely reason was to fund renovations at 34 per cent but 19 per cent borrowed against the house to fund private schooling for the kids, data from Finder shows.
Housing expert Steve Jovcevski from comparison website Mozo told news.com.au it was very concerning people were funding expenses like schooling by borrowing against the value of their homes, particularly in a time of falling house prices.
"If you can't afford to pay school fees out of your bank account you shouldn't be sending your kids there," Mr Jovcevski said. "You shouldn't be using redraw.
"If you keep increasing the loan you're never going to pay it off by the time you retire or you'll have to use all your superannuation to pay it off."
The reason for this is that during the housing boom, prices skyrocketed, leaving many Australians suddenly able to access tens of thousands of dollars in equity that they used to fund renovations or consumer spending.
Higher house prices meant more equity that was too tempting to resist.
But in a falling market, homeowners can find themselves in trouble.
BORROWING FROM TOMORROW TO FUND TODAY
Finder's data showed many were also dipping in to home equity to fund household expenses or to consolidate debts on credit cards or personal loans.
Kate Browne, personal finance expert at Finder, said that redrawing a mortgage or refinancing to take advantage of improved equity was "increasingly attractive" but required caution.
"It's become a popular tactic for those wanting to consolidate debt - but they don't think about the greater cost paying it off over 25 years," Ms Browne said.
"That $5,000 new TV could end up costing you $7,600 over the life of the loan."
A bigger mortgage requires larger mortgage repayments as well as extending the mortgage lifespan.
Ms Browne said there could be serious problems if homeowners borrowed too much against the home loan and doing it to fund schooling was particularly serious.
"Parents want the very best for their children, and for some that means private education," she said. "But it's a worry to see some spending more than they can afford and risking their homes for something that in Australia we can get for free."
MANY AUSTRALIANS LACK A SAVINGS BUFFER
Mr Jovcevski said borrowing against a home to fund education demonstrates how few people have savings on hand they can easily access.
"Everyone should have some kind of buffer, I think the reason they don't is that people want to live beyond their means," he said.
"We're finding it out more and more as more and more people use their equity to fund their lifestyles."
Previous research from UBank's science of Spending and Saving Experiment found 35 per cent of Australians live payday to payday.
Stephanie Chia, from Melbourne borrowed against her home equity two years ago to the tune of $25,000 to fund a new car purchase.
She told news.com.au she did it because she knew she had another $20,000 payment coming up but needed a car.
"Someone came to me with a refinancing strategy to refinance my equity with the apartment and get the 20k out," Ms Chia said.
"I won't buy a new car after this - I stay away from credit cards."
REA's general manager financial experiences Eloise Wall told news.com.au the data showed four in five Australians "aren't being frivolous" and those that do redraw mostly spend the money on "stuff that matters".
"Your home loan is a very cost-effective source of extra capital," she said. "Everyone would like to be debt free but people have genuine needs."
Silky Shah from Pendle Hill in Sydney redrew $20,000 from her home loan last year to pay for a family emergency back in India.
"My father in law incurred a loss in his business but he wasn't able to cope," Ms Shah said. "It was affecting his health so we thought we would send some money over.
"We didn't have any other savings, we didn't want to get into any kinds of debts to do this."
REDUCING EQUITY MEETS FALLING HOUSE PRICES
Mr Jovcevski said falling house prices presented a "big risk" for many people increasing their loans. The plunge in house values could push some back into lenders mortgage insurance (LMI) territory.
LMI is paid on a loan when borrowers have less than 20 per cent equity in the property and can cost tens of thousands of dollars, growing as the borrower's equity share in a property falls.
"In a falling market, there's a big risk that you can't refinance anywhere else and you may enter LMI territory," he said. "It'll cost you a fortune."
David Ross is a freelance finance writer. Continue the conversation @FakeDavidRoss