Large Debts £42k - I wasn't worried but I am now!

[Deleted User]

I have nominated post 28 by westernpromise as post of the month for march. No messing around. This post would have pulled me up if I were creeping into debt. Take note OP. What he/she said was superb advice

Bestthingsinlifearefree

HI Nickmack,

Not sure if this point has been suggested already as I have just skim read the thread.

Is your mortgage a capital & Interest repayment mortgage ?

If it is you could switch to interest only for a couple of years, this could reduce your monthly mortgage by a couple of hundred which you could then throw at your debts.

(obviously while you are paying interest only you are not reducing the overall amount of the mortgage debt).

When things are under control you can then switch back to capital & repayment mortgage.

Good Luck.Keep positive.

nic82

A couple of things....

Are you sure that you have quoted your student loan interest rate correctly. My rate is higher than yours (3.2%). It goes up each September, so just wondering if you didn't realise. (Although, I've just read that you're on the "old" scheme, whereas I'm on the newer one, so maybe that's something to do with it?)

Also, contrary to what other people have said, please please please do not cancel your life insurance. Obviously shop around to try and find a cheaper policy and even cancel the critical illness cover, but please don't cancel your life cover.

Westernpromise said "You are young enough to resume these later in life. ". I agree with everything else that s/he (sorry, not sure which) said, but not this. Yes, I can understand the principle of not paying for something which, thankfully, does not happen to the majority of people in their earlier years, but the hell and mess you will leave behind for your wife if you do die will be awful if you do not have this protection.

I am speaking from a relative's experience...bought house on 100% mortgage, didn't "get around" to arranging life insurance, paid less than 12 months mortgage payments, partner died (aged 24, road accident, no fault of their own). Remaining partner has had to sell house as cannot afford mortgage on one salary and has had to move in with friends, as there will not be any money left over after mortgage company has been paid back, redemption fees, estate agents fees and solicitors (in fact, will actually end up out of pocket).

Luckily they didn't have any more debts between them, but can you imagine your wife having to find the money to pay off £42000-worth of debt, in addition to having to pay the mortgage and all bills each month, all on one salary, in addition to coping with her grief?

I'm sorry if this has come across as being too strong, I don't mean it to. I just don't want what has happened to my relative to happen to anyone else. I wouldn't wish it on anyone.

westernpromise

nic82 wrote:

Also, contrary to what other people have said, please please please do not cancel your life insurance. Obviously shop around to try and find a cheaper policy and even cancel the critical illness cover, but please don't cancel your life cover.

Life cover is probably a condition of the mortgage, but it may be redundant - many employers offer a death-in-service benefit of 3 or 4x salary which obviates the need for it.

Only the OP can really make this call, but if I were faced with an actual crisis now, versus a conjectural crisis later, I know what I'd do....

System

Phone PayPlan. I have over 46,000 of debt and your story almost mirros mine. I felt better as soon as I had realised how much the debt was, I felt better when I found this website and realised the extent of the problem - I wasn't alone, I felt better after reading threads on this website and getting support of other users (like I'm doing now) and I felt that 'tomorrow was the 1st day of the rest of my life' when I spoke to PayPlan and they have agreed to take me on a DMP and my monthly payments have reduced into one monthly manageable payment and I will also have a chance to save. Hude weight off. Phone Payplan or CCCS. Welcome to the jungle!

paullwill8

westernpromise wrote:

The replies you've had so far are well meaning but let's face it, your problem here is that your debt burden is insupportably huge compared to your incomes.

As a quick rule of thumb, anyone whose debts exceed their gross income is in bl00dy trouble.

You said you made about £1,500 a month and the missus £800-odd. I make it that your gross earnings must be about £25,000pa, and hers about £13,000. So you have debts of £42,000 but gross annual earnings of only £38,000.

That's the problem right there, matey. In monthly terms, it means that your minimum expenses already exceed your income by £350 a month. Including the interest that's accumulating, you are getting in deeper at a rate of well over £4,000 a year. Your incomes are not going up by £4,000 a year, are they? No, thought not - so holding out for pay rises, chipping away at the gas bill, and shopping at Netto aren't going to solve a problem on this scale. Even if they were, are you really going to sit home for the next 15 years eating Netto baked beans and living like a hermit? I don't think so.

You need to step back from the situation and restructure your financial life, IMHO, otherwise you aren't going to get out of this one.

If your house is worth £140,000, sell it and collect the £20,000 equity. Please don't get hung up on the idea that renting is 'money down the drain'. It is not. When you rent a house, you rent it for roughly 5% of its value. When you buy a house, what you rent is the money that buys it - also at about 5% a year. It's exactly the same thing, with the only difference being that until recently, houses appreciated a bit.

You'll have say £15,000, after costs and early redemption fees. Use £14,000 of that to clear your Morgan Stanley, Halifax, and HSBC debts. Use the rest as a deposit to rent an identical property to what you have now. On current rental yields of about 5%, a £140,000 house will rent for about £600 a month.

Doing this will roughly halve your credit card outgoings and renting will save you £168 versus the mortgage. So you are £500 a month better off.

Next, cancel or freeze your pension and life / CI insurance arrangements. You cannot afford to budget for crises that may happen in the future, when you are facing a genuine one which is maturing rapidly right now. You are young enough to resume these later in life. And if your car is worth £1,000 or so then make sure you have third party or at most TPFT insurance on it. After allowing for the excess, comprehensive only gives you a few hundred quid in benfits and is probably quite a lot pricier.

That's another £100 saved.

Now you can start thinking about micro-savings: managing expenses better; cashback credit cards (paid off every month) for day to day spending, eating German groceries from Netto, freebies from work (stationery, phone calls, etc) and so on.

You thus go from being £350 a month underwater to being £300 or so per month in surplus. That surplus goes towards your debts, the worst first. Don't get preoccupied with paying off individual cards. Cards are just a vehicle for debt. Attack and kill the worst interest rate first.

Once you've done all that, you have done all you can to reduce costs. Your only remaining line of attack is to start earning more money. You need to be completely focused on this. Will selling stuff on eBay make you more than kissing @rse at work? If so, do the former rather than the latter. Are you in your dream job? If not, why aren't you looking for it? Very few people on good money got there by being unionised or lucky. Most people got there by identifying the most lucrative career path open to them and relentlessly pursuing it. Many people who are skint have never ever done this and regard their career as something that happens to them rather than as something they could have influenced. Also, why does the wife only make half the national average wage?

After a year of the above you'll have gone from being £42,000 in debt to being about £24,000 in debt. The steady reduction in the minimum payments you have to find, and the likely steady but unspectacular improvement in your earnings, will means you can squeeze this debt harder over the next few years.

Incidentally your situation is not discreditable to you. Up to your bottom in debt you may be, but at least it's from specific things that are unavoidably costly - student loan, buying a house, getting married. Most people who do those things go into the red from doing them, so a bit of debt is not unreasonable. You've just let it get a bit out of hand - but it is fixable. Being in debt is like being fat - it takes a long time to get tha way and it takes an equally long time to reverse it.

Best of luck.

Absolutelt brilliant, where can you get helpful advice like that, MSE at its best.

sparkle84

Bestthingsinlifearefree wrote:

HI Nickmack,

Not sure if this point has been suggested already as I have just skim read the thread.

Is your mortgage a capital & Interest repayment mortgage ?

If it is you could switch to interest only for a couple of years, this could reduce your monthly mortgage by a couple of hundred which you could then throw at your debts.

(obviously while you are paying interest only you are not reducing the overall amount of the mortgage debt).

When things are under control you can then switch back to capital & repayment mortgage.

Good Luck.Keep positive.

I don't this this is a good idea you would be better off selling the house and renting than going IO mortgage for two reasons 1 you will pay back much more interest doing this and 2 my fear is that people get used to paying IO they keep meaning to change it back to repayment but never do - at the end of the day IO mortgage is just renting from the bank at the end of the term if you can't repay the capital the bank repossesses the house

westernpromise

sparkle84 wrote:

at the end of the day IO mortgage is just renting from the bank at the end of the term if you can't repay the capital the bank repossesses the house

Does anyone know how mortgage lenders react to this sort of situation? Will the lender demand that some alternative arrangement be put in place to repay the mortgage, or require extra insurance cover, or what?

sparkle84

westernpromise wrote:

Does anyone know how mortgage lenders react to this sort of situation? Will the lender demand that some alternative arrangement be put in place to repay the mortgage, or require extra insurance cover, or what?

They used to be much stricter anD insist on seeing what you have put in place to cover repaying the capital but now they rarely bother because people cancel the arrangements whenever they feel like it. To change to an IO mortgage even for a few years is pointless you would be better off selling the house paying off what you can and renting for a few years. More and more people on these boards are talking about IO mortgages I find this very very worrying. I consider advice to change to an IO mortgages on par with getting a consolidation loan DON'T DO IT

westernpromise

sparkle84 wrote:

They used to be much stricter anD insist on seeing what you have put in place to cover repaying the capital but now they rarely bother because people cancel the arrangements whenever they feel like it. To change to an IO mortgage even for a few years is pointless you would be better off selling the house paying off what you can and renting for a few years. More and more people on these boards are talking about IO mortgages I find this very very worrying. I consider advice to change to an IO mortgages on par with getting a consolidation loan DON'T DO IT

Yes, as you say you are simply renting from the bank while the equity that could be reducing debts sits idly in the house.