I’ve been looking at a sample of nearly 24,000 debt-worriers who are also home-owners and who approached us for advice between 2005 and 2010.
Home-owners have traditionally often used debt-consolidation as their preferred route for making credit card and unsecured debt more affordable: “The value of the house has gone up – let’s slap the credit cards on the mortgage” (it costs less per month, it might cost more in interest charges in the long run).
Well, in these straitened times, does that still apply? The answer is that things, in some cases may be looking a little rosier – but, for once, it seems the most well-off amongst us may have more to worry about than those at the bottom of the pay scale.
First, amongst our enquirers, average unsecured debt exceeded equity in 2008 and 2009. In 2010, equity rose and overtook debt once more – quite sharply in fact.
Over the period, the average unsecured debt owed by all enquirers has come down too – so there might be room for consolidation in theory. In practice, there isn’t – because the banks aren’t lending to anyone other than their best customers – and people with substantial debts don’t often fall into that category.
We looked at average property values too – arranging the data to show the average property price for each year amongst home owners whose take-home pay fell into 6 bands between <£10,000 and more than £50,000.
Not surprisingly, the less you earn, the less your house is worth. Possibly surprisingly (I really must go and look at some property websites) the properties losing the greatest proportion of their value were those owned by the wealthiest respondents. Between 2005 and 2010, properties owned by people earning more than £50K had declined in value by 13%. Properties owned by enquirers in the lowest two income bands (<£10K and £10-£20K) had actually risen (well only be a per cent or three - but they'd not declined).
The biggest issue, when it comes to using your house as a money-well for debt repayment, is negative equity: If your house is worth less than you paid for it, then debt-consolidation is never going to happen.
I think this issue is particularly significant because, for many years now, the better-off have assumed than, barring the odd hiccup, their house is always going to enable them to turn short term, expensive, unsecured debt into long term, affordable, mortgage debt.
Well, I suspect there is a small crisis waiting to happen here - Higher earners who have made this assumption may well have increased their unsecured debt, just to make ends meet, over the last year or two, confident their property is going to bale them out.
Well, one in four of them won't be able to.
I was really surprised by the chart above. Every income group except the highest, returned exactly the same result for each year we looked at. In 2010, therefore, 10% of every group except those that earned £50K-plus had a house that was worth less than they’d bought in for. In contrast, 23% of those in the highest income band had lost the ability to use their house to fund their other debt.