Why remortgaging could cost more than you think

The illusionist David Copperfield is a truly remarkable man. Mugged at gunpoint in Florida last week, he apparently used 'magic' to make the robbers think that his pockets were empty. They gave up and ran away, leaving him still in possession of his wallet.

However the remarkable thing here is not, I think, the magic (I'm guessing the trick comes pretty early on in the Big Book of Magic), but the fact that Copperfield was prepared to risk his life - and those of the two female assistants with him at the time - for the sake of a few hundred dollars.

Some may think him foolish - what if his attackers had demanded more magic: asking him to catch a bullet in his teeth, perhaps - but in another sense his desire to hang on to his money is admirable. It is this kind of tightfistedness that keeps the rich rich. Sadly, it is also the kind of tightfistedness we have not seen much of in Britain in the past few years.

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Having accepted the idea put to us by the retail industry - that lifestyle is something you buy, not something you live - and the idea put to us by the financial services industry that only fools wait to buy that lifestyle (sensible people borrow money and have it now), we have spent the past decade on an unprecedented buying binge.

I'm not going to go on about the pointless things we spend our money on. Instead, I'm just going to give you one fact I think sums it up: last year we spent £350m on handbags. The average Briton doesn't need a gun to her head to persuade her to hand over her cash: just wave a piece of cheap Chinese tat in front of her and it's all yours.

There are signs that this binge is coming to an end, as even the mighty Tesco's growth rate is slowing, and in March one in three shops reported falling sales.

But if common sense is really kicking in, it is doing so far too late. British adults already have an average of £4,125 of personal debt each, with the under-30s by far the worst off. According to Alliance & Leicester they have a nasty £7,718 each in unsecured debt.

An awful lot of people are in an awful lot of financial trouble, although the banks and building societies reported last week that money was flooding into them from customers anxious to rebuild their finances.

Not everyone thinks that debt is too big a problem. Watch daytime TV for more than half an hour and you'll see an endless stream of cheerful adverts from financial-services firms that appear to suggest that being in debt is no bad thing. Why? Because it gives you the chance to consolidate all your pesky loans into one big loan with one 'simple monthly payment' much lower than the combined payments you are currently making.

And that's not all. When you consolidate your loans like this you also get the chance to borrow more at the same time (to pay for that new kitchen, new car or holiday of a lifetime) and, best of all, you can take a payment holiday before you start handing over your simple monthly payment.

Sounds great doesn't it? Well, it isn't. If you consolidate a loan with one of these companies you may find that you are paying a lower interest rate than you were on your credit cards. But there are good reasons for this. The repayment of the loan is spread out over a much longer period, meaning the total interest you pay is usually at least as much - and often more - than you would have paid anyway, despite the lower rate. The other, probably more important point is that most consolidators offer their services only to UK home owners.

They can offer you a lower interest rate than you can get from a credit-card company or reputable personal-loan provider because you are swapping unsecured debt for debt secured against your home. This is a win-win situation for them: if you keep up your payments they make a killing, and if you don't they force you to sell your home and collect their money that way.

And as for that payment holiday, don't forget that the interest is rolling up while you're sitting round admiring your shiny new car - the longer the holiday, the longer it will take you to pay back the loan.

But the interesting thing is that thousands of people who wouldn't dream of responding to these moronic TV ads are in effect following exactly the same path by remortgaging with the mainstream lenders.

Mortgage borrowing in the UK rose by £10.5 billion in January, not as a result of fast-rising transactions in the housing market but thanks to a boom in remortgaging as people tried to pay off unsecured high-interest debts after their Christmas binge.

Again, this seems at first to make sense: personal loans cost 10%-plus and credit cards average over 15%, but mortgage rates are only 5%-6%. But the end result is not good: short-term debt is converted into long-term debt and unsecured debt is converted into debt secured against your home.

The result? That flat-screen TV you paid for on a credit card (and then cleared the bill when you remortgaged) could, at best, cost you thousands of pounds more than you intended - and at worst cost you your home.

There is no cheap and easy way to deal with debt. The easy ways are expensive and the cheap way (pay it off fast) comes with sacrifice (no more plasma TVs or luxury holidays).

However, with high commodity prices putting global economic growth at risk and unemployment rising we may all thank ourselves in a few years if we make that sacrifice now.

First published in The Sunday Times (30/04/2006)