CityLiving: Be careful with equity release in a cooling market, says Jane Suiter

The booming property market of recent years means many people have previously undreamt of equity built in their family home. The temptation, of course, is to spend it and many banks are encouraging customers to do just that.

But, as the Central Bank warned this week, borrowings have now exceeded incomes in Ireland for the first time. The bank warned that borrowers would be vulnerable if they lost their jobs or if there was an increase in interest rates.

Other observers also caution that some borrowers could be getting in over their heads if the market turns down.

Perhaps the one product aimed directly at this market that got the most publicity when it was launched was Irish Permanent's Oneplan. The plan allows customers to agree a credit line with the bank; they are then given a chequebook to spend on anything they like. The top limit in Oneplan is 70 per cent of the value of your home and thousands have taken advantage of the offer so far.

However, it is simply not sensible to go for short-term purchases with a long-term loan like a mortgage. After all, the car will be long gone and the holiday long forgotten by the time you have finished paying off the loan. And, of course, your age is a key criteria to consider. In general, people's appetite for risk diminishes as they get older - and you also often have the ability to take on less debt.

Niall O'Grady of Permanent TSB insists that despite earlier fears, about 80 per cent of borrowers have used the money for housing-related purposes. "People are either extending or refurbishing their homes or using the money to give children deposits for homes or for a deposit for an investment property," he says.

But others caution that some of these people may be taking a step too far. Jim Power, chief economist at Friends First, says that the maximum equity that people should take out of their home is about 50 per cent. "If your are in your fifties, then probably 25 per cent is as much as you should sensibly go for. People in their thirties and forties could reasonably go for about 50 per cent of the value so long as they are sure that their income will remain high enough to service the loan. But I would caution anybody against going further than that," he says.

That percentage includes the amount you already owe on your home. In other words, if your home is worth €800,000 and you have a mortgage of €150,000, the most extra you should put on is €250,000.

According to O'Grady, most people using the product are in the 40-45 age bracket with very few over the age 50. "Even if we give you a credit line of €200,000, that will diminish as you get older. After all, normal credit criteria apply and you need to be reasonably far way from retirement to be comfortable with larger mortgage repayments."

Power agrees: "Taking on a large amount of debt after the age 50 is often not a good thing to do. It could put too much of a financial strain on you and could also mean passing on a debt legacy rather than an inheritance."

Nevertheless, he adds that the long-term fundamentals are still good for the Irish housing market. Demand remains strong, the young age profile is still supportive while the impact of continued inward migration is often forgotten. "Bar a really serious global geo-political shock, such as a rise in oil prices to over $100 a barrel, there is no reason to suspect that prices will fall back," he says. "Growth may be 7 per cent this year before easing back towards 4 per cent over the following years but, within that, some areas will do better and others worse."

But, of course, the projection of house price growth is only likely if interest rates do not rise significantly from their current levels. If rates did rise significantly then the affordability issues for owner-occupiers and lower returns for investors would undermine these returns.

However, the market is expecting no more than about a 1.5 percentage point rise in ECB rates over the next 18 months to around 3.5 per cent, pointing to mortgage rates of up to 5 per cent. After that, it is far more difficult to call.

But, according to Power, rates are unlikely to go far above this. "Interest rates are likely to rise to 3.5 per cent to 4 per cent at the most. And even if you believe that the eurozone economy is going to boom, rates will still not go above 6 per cent over the next decade and that is only likely if the eurozone successfully integrates the accession countries and gets its structural house in order. In addition, the boost to the growth prospects of Europe that would need for such a rise in interest rates would boost the Irish economy so much it would, to a great extent, offset the impact of higher rates."

But, of course, if the worst did happen then you could lose your home if you use it as security or indeed pile too much debt on. It is also important to remember that, in a more modest environment for house price growth, inflation in house prices will not impact so much on the real value of your debt.

But, as Power says, many investors will still believe that property is one of the best investments. "So long as you are not overstretched and don't tie up too much of your family home, the right location will still pay off," he says.