Householders rush to cash in on bargain rates: REMORTGAGING: Sabuhi Mir looks at those people releasing equity, thanks to historically low interest levels, and what they are doing with the money

Fast-rising house priceshave produced an unlikely topic of after-dinner conversation this year: remortgaging.

Switching lenders or increasing the size of the mortgage has become a national pastime as once-cautious homeowners grab low rates to release equity in their homes.

Most people release equity for prosaic reasons such as home improvements, but for others it is a life-changing financial decision.

Figures from the Council of Mortgage Lenders show that lending in October rose to its highest level since July, driven primarily by an increase in remortgaging to 43 per cent of the total. Remortgaging was 22 per cent higher than in September and, at Pounds 8.9bn, was at its highest monthly level since the survey began in 1992.*

According to Michael Coogan, director-general of the CML: "It seems highly likely that most people who are remortgaging may also be releasing equity, contributing to the Bank of England's concerns that equity withdrawal is fuelling consumer spending.

"Borrowers need to remember that although mortgages are cheap at the moment, inflation will not reduce their debt burden as quickly as it did in the past."

Declan Page, director of Capital Oracle, an independent financial adviser, says that, as well as their seeking lower monthly repayments, there are several main reasons why people release equity. "People are releasing equity for a variety of reasons. To purchase a second property, for home improvements or to consolidate existing credit card debt.

"Remortgaging has been very popular as interest rates have hit a historical 39-year low. It has been very easy to swap your mortgage, with borrowing rates around 5 or 6 per cent."

The average amount of equity withdrawn through remortgaging is Pounds 27,000, according to research carried out by MORI Financial Services.

For this princely amount, racier types could buy a BMW 5 Series Touring Car. For the more soulful, Pounds 23,500 was recently spent at Christie's on a taped interview between John Lennon and Yoko Ono.

According to the Bank of England, 64 per cent of those withdrawing equity spent some of the money within the first six months, 20 per cent used the money to pay off debts and only 9 per cent saved the money for any length of time.**

Of that 64 per cent, 76 per cent spent their money on home improvements, 22 per cent made purchases for the home and 7 per cent bought a car or other vehicle.

Christian Bennett, 28, from Eastborne, East Sussex, found his remortgaging deal with Coventry Building Society on the internet.

Mr Bennett took a seven-year mortgage at 4.99 per cent interest to replace his variable mortgage at 5.9 per cent. He took out an additional Pounds 6,000 cash for home improvements.

But not all remortgaging is done with home improvements in mind.

Ashley Heather, an entrepreneur, recently used the Pounds 50,000 equity he released from remortgaging his two-bedroom flat in Fulham, south-west London, to establish an internet music technology company, musikkube.com, in New York. The Pounds 50,000 went towards buying computers, wireless technology and paying for legal expenses for patents.

Mr Heather is also thinking about setting up other ventures in New York, including a go-kart track. He previously set up a wireless start-up specialising in wireless credit card security called Cast Technologies.

There is concern this trend in remortgaging and releasing equity will push UK house prices up even further in 2003, as people over-extend themselves by borrowing large sums to cash in on a boom that may already be waning.

The Bank of England has expressed doubts about excessive levels of borrowing by house-buyers. Mervyn King, who will take over as governor of the Bank of England next summer, warned in a speech to the London School of Economics last month that poor households with large borrowings were particularly vulnerable should house prices fall.

"If significant numbers of debtors have little net worth - recent first-time buyers with high debt-to-value ratios are a prime example - then an unanticipated deflation could cause a sharp fall in aggregate consumption spending," he says.

It remains to be seen whether people will continue to remortgage at the levels seen this year. If they do, house prices may continue to grow at unsustainable rates, perhaps leading to a crash.

If they don't, prices may tumble even earlier.

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