Borrowing against house increasingly popular, but selling up a last resort

Home equity withdrawal has become increasingly popular over the past decade, despite the convulsions caused by the global financial crisis, a new peer reviewed study has found.

The study from the Australian Housing and Urban Research Institute (AHURI), Housing equity withdrawal: uses, risks, and barriers to alternative mechanisms in later life, sheds some interesting light on the way different people use their wealth in this critical period of their life.

In 2010, 18% of older home owners took some, or all, cash out of their housing equity. In 2001/2002 this sat at 13%.

The dominant form of home equity withdrawal for those under pension age is “in situ” equity borrowing (staying in the home and borrowing on the asset).

For those above pension age there is a shift towards downsizing or selling up.

It is noted that home owners making these decisions are more likely to suffer from material deprivation than those who do not touch their home equity, while those who withdraw equity are “also have more housing-oriented wealth profiles”.

“Unsurprisingly, income poor-housing asset-rich groups feature prominently among groups cashing in housing equity,” the report notes.

Mortgage equity withdrawal (MEW), however, is used by those who appear to have sounder economic positions than those downsizing or selling up.

MEW was found to most commonly be a technique used by people under pension age as they look to spend on a wide range of items, including holiday spending, home maintenance, car repairs, upgrades or children’s education costs.

Meanwhile, older home owners selling up, usually have little income or assets to fall back on, relying on housing-dominated portfolios with little other assets.

“They are also the least able to raise emergency funds among all the groups investigated, and so most likely to sell up when financial emergencies arise,” the study notes.

“While in situ equity release by adding to mortgages is common, particularly in the group approaching retirement, and associated with pressing spending needs, the typical in situ equity borrower has a relatively strong financial and employment context. These owners are becoming more indebted, but their borrowing is not reckless.”

If serious misfortune is, however, faced, then financial stress may not be far away.

Those downsizing or selling up were found to have most likely faced ill health, separation, divorce or bereavement prior to sale.

“One senses that amidst older downsizers and sellers, in situ MEW is no longer an option to cushion living standards in the face of adversity. Importantly, they appear to be options that older female, single person households are prone to fall back on.”

Selling up is, ultimately, seen by most as a last resort.

Risks the study notes you should be aware of:

• Adverse life events can quickly alter your ability to repay any new borrowings.
• Life events can force quick financial decisions to be made that are not well thought out, leaving an elevated risk of making a poor decision.
• Transaction costs when downsizing can be substantial.
• Social isolation can occur on the sale of your primary home.
• Those selling up to re-enter the rental market may face a lack of security.