Homeowners are taking advantage of a global housing boom by pulling equity out of their homes at the highest volume since the financial crisis.
In the U.S., homeowners withdrew $63 billion in equity from their properties through more than 1.1 million cash-out refinances in the second quarter of the year—the largest quarterly volume since mid-2007, according to data company Black Knight. Just under one in five American homeowners say they have pulled money out of their properties in the last year, according to a survey in late October by market research firm Harris Poll, with another 18% saying they are considering it.
Homeowners elsewhere are also finding the idea attractive. In the U.K., net equity withdrawals topped 13 billion pounds ($18 billion) in the first half of the year. That’s the first time since 2008 that Britons took out additional equity instead of injecting cash into their homes, according to Bank of England data.
Mike Reed, the founder of a copywriting agency in London, was one of them. He remortgaged his three-bedroom apartment near Wimbledon earlier this year to fund a kitchen and bathroom remodel. In part, “it’s something I want for myself,” he said. The 51-year-old also believes the value added to the property—which he paid 655,000 pounds for two years ago—will make up for the additional debt.
With borrowing costs at rock-bottom levels, he was able to tack on 30,000 pounds to his mortgage at a 1.54% rate, fixed for five years.
“I'm conscious that there is a risk, I can't guarantee that the value will go up to cover the extra expenses,” Reed said. “But living in London, I'm confident that prices will creep up.”
Harris Poll's survey showed that like in Reed’s case, the top reason to access cash for Americans was to fund home improvement projects. Other investment opportunities and paying down debts followed.
An astonishing surge in home prices over the last 18 months has convinced other homeowners to do the same. Plus, ultra-low interest rates are making it possible to secure cash-out refinancings and end up with the same—or sometimes lower—monthly mortgage payments.
While taking advantage of the extra cash may seem like a no brainer, it’s far from a risk-free option. Homeowners are ultimately increasing the debt load on their property and shrinking their available equity. If housing values were to fall, that could leave them owing more than their property is worth or with too high a loan-to-value ratio to refinance down the line.
Home-equity loans had their heyday in the run-up to the financial crisis. Tempted by climbing values, homeowners used their properties as virtual ATMs to fund everything from fancy vacations to jet skis. When values crashed, borrowers saw their supposed equity vaporize.