Big house but no cash? You’re asset rich, cash poor

by CCCS on 18 August 2011  |  8 comments
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You might have a lot of assets, but that doesn’t mean you won’t have money worries.

It sounds like it shouldn’t happen, but here at CCCS we come across people who have plenty of assets but no money on a daily basis.

This is often no fault of their own; as we’ve blogged about before, most debt is caused by a sudden income shock such as unemployment, illness or redundancy.

We’re finding more and more that people from all walks of life are being hit with the unexpected and are not financially prepared for the consequences. They often have no savings at all.

Mentally they have often justified their lack of any savings with the thought that the house has a couple of hundred thousand pounds worth of equity in it (in some cases seen by CCCS, the equity in a client’s property has approached half a million pounds).

Sure they’re carrying a relatively minor amount of credit card or loan debt, but who wouldn’t feel in a superior position with similar amounts of equity?

When the income stops coming in

The problem starts when the income suddenly stops; you can no longer pay the credit cards, the mortgage or even for the basic essentials. The house is reluctantly put on the market but you might find it doesn’t sell straight away, and then suddenly the very real aspect of downsizing hits you.

You can’t get another mortgage because at the present time you have no income. You’re going to have to use the equity to buy a new property outright or use some of the money to rent a while until your situation improves.

But what if it never improves? Do you really want to be renting, spending ‘dead’ money on a property that isn’t yours?

So you opt to significantly downsize, clear your debts and start again.

What will your friends think?

We’ve blogged before about being complacent about your debts; we’ve even talked about behaving like you don't have debt and have no worries regards money. We see this sort of attitude day in, day out. Don’t let the equity in your property give you a false sense of security about carrying debt.

It’s always best to be prepared and to have some savings and insurances to fall back on. There can be no excuse for not protecting your assets by making sure one of those assets is readily-available cash, there to see you through times when you may have no other source of income.

A family with the sorts of amounts of equity we’re talking about will have a significant property and a certain standard of living. They’re lucky to be able to afford to sell and buy another property outright, but it will be a massive change to the standard of living they’re used to.

This makes it all the more important to prepare for the unexpected, especially in these times of economic turmoil. The equity in your house is only realisable by selling the property, and in the worst case scenario you might not find a buyer at all. In this position your money is locked away and you no longer have the key.

The owner of the most expensive home in the UK recently defaulted on a £50 million mortgage on the property. We expect that he sees downsizing a little different from the rest of us.

However, if he’s reading this and does have debt issues, he might want to use our online counselling service Debt Remedy. We don’t think he’ll qualify for a debt relief order but it might give him some tips on what solutions are available.