Overpaying mortgage vs reduced loan term

Cazzr

Cross posted from Debt Free Wannabe (thread 1730487) as suggested here might be a good place to get more advice.

I'll try to be as brief as I can..

We bought our 2 bed terraced house in May 2006 (with an 8% deposit) as we were expecting our first child and we wanted to settle down. Love the house and the area so no problem there. Just to note, we did not overstretch ourselves here as we were offered A LOT MORE than we took.
We remortgaged last June onto HSBC 4.99 2 year fixed and at the same time reduced the term by 3 years, so due for renewal June 2010... Looking at sites like mouseprice etc it looks like we are currently bordering on negative equity. I know it's not currently a problem as we are in a deal for another year yet but I'm thinking ahead here...

Just after buying the house/having our son, cue the `Light Bulb Moment`...we decided to get our finances in order as we had both been building up credit card debt for some years (swapping from 0% to 0%) and I guess our change in circumstances made us grow up a bit and look towards the future.
We took out a whopping loan of 19k to consolidate our debt in a joint A&L loan @ 5.9% for 4 years. Our monthly payments are approx 444 which I feel is a rather aggressive monthly payment to get the debt paid off as quick as is comfortably possible. We are now just over 2 years through. This is a good feeling.

We are now careful with money and can just about afford all our outgoings but I am looking ahead to next June...
By then we will have just under a year left to run on our loan but considering we are likely to be in negative equity, or at least no equity it certainly is likely to put play to our original plan of trading up and I'm guessing is not going to leave our options wide open for good mortgage deals.
Sure we can go onto the SVR which at present is a lower rate than we currently have but I am concious that it leaves us vulnerable should the base rate shoot up... Thoughts of hyperinflation and whatnot are pickling my brain.

Now, whereas I'm happy to stay put in our current place until we are better placed financially to trade up, we are thinking ahead about trying for no 2 next year and want to feel I have things arranged so that we are not too overstretched financially.

Now, to my question:

I have thought about whether we would be sensible to refinance our loan to extend the term and reduce our payments and therefore allow us to overpay our mortgage so that we can try to "increase/give us some" equity or reduce the negative equity..
Sure we won't pay off our loan as quick but it will leave our house/mortgage less vulnerable.
I would begrudge losing the nice 5.9% rate on our loan but if the bigger picture suggests this would be sensible in the long term, needs must..
Incidently, I had thought of moving the debt to a lifetime rate credit card (about 6.9%) but not sure if this is possible as it's currently a loan not a credit card? Either way the term would likely increase..

We both have fairly stable jobs (touch wood). I work 4 days a week and OH is full time, and are insured fairly well in the event of sickness/redundance etc and both have good credit history (no missed payments etc).

As an aside, our childcare costs will reduce this September as my son will get the 5 free pre-school sessions a week term time.. This may give us a bit extra to overpay the mortgage.

Congratulations if you have got this far, any advice will be gratefully received..

Rafter

Cazzr,

Well done you for thinking ahead like this!

Given the size of mortgage and amount of deposit you would need to save to have a chance of moving I think you are going to have to take a risk and make sure that you have a plan if the HSBC SVR is higher than at present when your fixed deal comes to an end.

Your A&L loan is cheap and trying to get a longer term loan will be more expensive and will count against your borrowing capacity when you come to remortgage - although that shouldn't be an issue if you are both still earning and your mortgage is less than 4x your combined income.

You can also hope that HSBC are willing to offer new fixed rates to maturing customers at that time.

Good luck

R.

Cazzr

Thanks for your response.
If all goes to plan I won't have started maternity leave by then anyway so we will both be earning our usual salaries. I may even have gone back to full time when pregnant to help save up, tho juggling everything when full time was a nightmare before (I went full time from Feb 2008 - April 2009).

Our mortgage is less than 3 times our joint salary, even with me working 4 days and yes, I'm crossing my fingers we will be able to fix again with HSBC, depending on the deal....

We will need to make a decision on when we want to move as to how long we want to fix for tho, hence why SVR might be an option but I'm not adverse to staying for a few more years if it seems more financially sensible. I hope to be more part time after no 2 so a smaller mortgage would be more sensible, even if we WOULD be bursting at the seams!.

I did a little spreadsheet (amortization table) to work out what would be left of the loan by the time we remortgage and it looks alot less scary so hopefully this will work in our favour... final payment month is march 2011, roll on then!

I agree giving up the 5.9% would be painful (i'm a true scot at heart) but how would it affect our borrowing capacity? I thought they looked at the monthly payments rather than outstanding balance so smaller payments would look better (more affordable)....?

Rafter

As I said, don't think the amount you can borrow versus your income is the issue - it is the lack of equity in your home which you can only really address by saving.

Whether it is better to 'create savings' by spreading your existing A&L loan over a longer period or just borrowing more unsecured to put down a deposit when your current mortgage deal expires doesn't seem to make much difference.

Might also be worth producing a statement of affairs and posting it on the debt free wannabe board. The most efficient thing is going to be trying to save what you are currently spending if you can to try and build up a bigger deposit or equity share in that way.

R.