Remortgage debt fuelled by new car purchases

31 August 2004
New warnings reveal that homeowners are paying up to twice the market value for a new car, adding to UK's debt problems.

Many British consumers are so keen to get a new car they remortgage their homes to finance the purchase motor price guide and market commentator, WiseBuyer's, has found.

Adding £13,000 - the price of an average family hatchback - to a 25-year mortgage will cost an extra £85 a month the website calculates.

This means the actual cost of the car nearly doubles to a staggering £25,422 over the course of the mortgage - assuming that the rate of borrowing remains the same.

"Record new and used car sales are being underpinned by a growing mountain of debt," explains WiseBuyer's analyst, Nic Barfield. "Cheaper, short term finance options from dealers, manufacturers and banks are being too readily ignored."

In 2003, UK households spent more than £45 billion on approximately 1.2 million new and seven million used cars.

At the same time, homeowners borrowed £121 billion on remortgage loans according to the Council of Mortgage Lenders, with 45 per cent of the equity released for the purpose of new home improvements, holidays and car purchases.

"Compared to traditional finance options, household equity release is likely to increase the average long term debt by forty percent or more than £4 billion," explains Mr Barfield.

He concluded by saying: "People need to ask themselves if using equity release to finance a new car really makes sense. After all, that Focus or Megane will only be worth half its current market price in two years' time, and after ten years or so, it will only make bargain banger money. The loan, however, will live on."
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