Don't sign away your freedom for a purple Audi

published 7 November 2007

With Hometrack reporting that average house prices fell for the first time in two years in October and the Council of Mortgage Lenders forecasting that repossessions could rise by 50% in 2008 most rational people wouldn't, I don't think, feel that now is a particularly good time to be in negative equity.

Not so the mortgage sales teams at Abbey. No, they are still happily flogging their "100% plus" mortgage. This lets you borrow the full purchase price of the house or flat you want and for good measure another £25,000 on top of that.

What's more, having dumped you into negative equity with the stroke of a pen, Abby also have a few suggestions about how you might spend the extra cash on offer "renovating your home, buying a new car or consolidating all of your debts" perhaps.

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This is shocking stuff. The first and last ideas aren't great (if you can't afford to renovate you shouldn't do it, and debt consolidation usually leads to higher interest bills in the end) but the second - buying a car with mortgage debt - is completely insane. Why on earth would you borrow against one asset that is by most accounts already falling in value (your house) to buy one that will do the same just fast (a new car)?

Lets say you borrow £125,000 on a £100,000 property. You then rush off to spend the left over £25,000 on a purple Audi A4. Depreciation on the car after a year will be at least £6,000 (and probably more). So take one of these loans out now and assuming house prices don't fall further, next November your assets will be worth only £119,000. That's not good, given that your debt will still be near £125,000.

And if house prices keep falling it will be even worse. Note that once you owe more on your house than you can sell if for you are trapped: you can't sell it or your debt will fall due, but staying and continuing to pay interest you can't really afford on the price of a depreciating asset - is usually pretty miserable too.

Anyone who falls for Abbey's marketing nonsense this year will soon find that they have effectively sold their freedom for the price of a new car.

This article first appeared in The Evening Standard

Any comments on this piece? Email them to: editor@moneyweek.com

Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).

After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times

Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast - but still writes for Moneyweek monthly.

Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.