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A clampdown on lending by banks and the collapse in property values will plunge hundreds of thousands of families deeper into debt, according to a study that has found the living standards of many homeowners depend on cash from remortgaging their homes.
Academics who carried out the study said a freeze on mortgage equity withdrawal for all but the wealthiest homeowners would cause a "welfare nightmare" that would send the finances of many families into a downward spiral.
Researchers at Durham University said that though many people used the cash released by extra mortgage lending to improve their homes or buy new cars, an increasing number need it to supplement their day-to-day expenditure. By 2005 more than a third were relying to some extent on the mortgage lending for this purpose.
"The credit crunch is a welfare disaster for struggling households who have previously relied on the option to borrow up against the value of their home," said Susan Smith, a housing expert at the university. "In the early years of this century we saw a form of self-administered welfare payment develop where homeowners cash in on their homes in boom times: to support children, smooth over a fall in income or meet the costs of relationship breakdown."
The researchers looked at the borrowing patterns of more than 8,000 families who took part in the British household panel survey from 2001 to 2005. They found that in any one year, two in five homeowners ended up with higher mortgages than in the previous year, even though they had not moved home. On average, these households borrowed an additional £5,000 to £7,500. In 2005, couples without children accounted for 12% of remortgagers and couples with children comprised 36%.
The survey asked if respondents spent the cash on home improvements, extensions to their home, on a car or other consumer goods. A fifth category was "other specified reasons". In 2003, 36% ticked that box, compared with 12% in 1991.
To make matters worse, many homeowners were regularly remortgaging up to 75% or more of the value of their home to release cash for spending. With property prices falling by a quarter in real terms since September 2007, most of them will soon be in negative equity.
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