IO mortgage to clear debt?

HelpForParents

Hello,

Complete money newbie here so please bare with me.

We have got ourselves in some increasing debt with 2 credit cards and other debts. Basically I can make the minimum payments with my other expenses being paid but the balances aren't shifting. Good point is my credit rating hasn't been affected because I always manage the payments but I am not getting any better as a whole, just making the payments.

Roughly I have approx £60k equity in my house, with approx 75% LTV (i.e. house is valued at £240k and £181k outstanding over 29 year term). I have no early repayment charge on my current deal, approx £1050 pm.

We have accumulated about £14k on CC's hence minimum payments just are not touching the balance. My income covers my outgoings, although sometimes they are even, sometimes outgoing is a bit more.

Is it feasible that I could do the following:
- Obtain an Interest Only mortgage with fixed rate for 5 years.
- Use the "saving" on the mortgage payment, lets say £400 pm, to hammer the CC balance and other debts.

After the 5 years is up, what do I do then? Get a fixed rate mortgage for the remaining term? I am a little in the dark so any advice is appreciated!

Hugh_vB

why would you want an interest only mortgage?
see if you can release 5% equity on your house by upping the mortgage to 80% ltv and use the cash to clear your remaining debt (it would give you about 12 grand).

then save up and overpay the mortgage over the next year or two by 12 grand to get back to where you were.

VIGILANT22

HelpForParents....Who is yr lender?..as you may be able to take a further advance

If you consolidate debts, is the same likely happen again....?

Cannon_Fodder

Tackle the cause of the CCs. Not the effect.

Get to debt-free wannabee forum, you'd be surprised at the trimming of monthly budgets that they can find, that would allow you to dent the CCs without securing the debt against your house.

HelpForParents

Thanks for the replies.

The cause for CC has been sorted some time ago since we had our first child. We travelled a lot whilst we could and enjoyed ourselves. Priorities have completely changed now - I have slowly but surely trimming down everything I can. Nothing has been put on cc for about a year.

My reason for an IO mortgage was purely speculative.
At the moment we hover over the 75% LTV so I didn't want to release any equity if I can help it, I would rather keep it at 75% or reduce under that to get a better mortgage deal - variable at the moment until July when we will be under 75%.

So I figured if I am paying £1050, an IO payment would be approx £500 (even with a < 75% mortgage deal monthly payment would be £800), I could then use the difference for a few years to pay off CC + other debts without affecting the equity of the house. If obviously means it will take me longer to pay off the mortgage in total but I will be free of other debts.

Or am I looking at this wrong?

getmore4less

As has been said have a look at DFW, do a SOA you might be suprised at what else you could cut back on once the numbers are done.

There are a few other options to look at as well, IO mortgage can be part of the solution but other things like 0% BT CC and 0% purchase cards can make a big impact if used correctly. Mortgages are not the only way to get cheap money.

With an IO mortgage you are indirectly moving unsecured debt to secured debt which does introduce an element of extra risk long term. But once high rate debts are gone this can be resolved with over payments.

At the end of the day it is how you want to prioritise your spending, even people not in debt should do the exercise of checking where all the money goes. you need to look at all the spends make a plan and have an unsecured Debt free date that you can target and follow that up with a mortgage free date.

Cannon_Fodder

Some would say having a child is more expensive than travelling for a while...maybe your outgoings will find a way to increase in the near future. Deferring the problem with IO is not the answer, imo. It needs a more fundamental approach. You need to have your lightbulb moment.

How do you get the repayment figure of £1050 changing to £500 for IO? I don't think that is correct. Use http://www.bbc.co.uk/homes/property/mortgagecalculator.shtml to see the real change.

Punching in the information provided so far, £181k outstanding with 29 years to run, to get to a £1050 per month payment means the interest is roughly 5.5%. Obviously this is a bit of guesswork on the rate, so punch in your own exact interest rate/numbers and see what you get.

On the assumption I have made, £1050 repayment will be £830 on IO.

Not exactly a substantial drop. Its going to take a long time to repay £14k like that. And all that time not denting the capital of the mortgage...

Also use MSE's mortgage calculator to play with potential figures/choices, its got an amortisation element, i.e. demonstrating the yearly shift in capital/interest payments; http://www.moneysavingexpert.com/mortgages/mortgage-calculator

Now, yes, any repayment mortgage has a smaller portion of the total mortgage payment being directed at repayment of capital in the early years, accelerating as the oustanding capital reduces, freeing up previously interest-directed money into the repayment side.

However this problem is exacerbated with long mortgage terms, like yours.

Let me demonstrate why. If the same monthly amount, £1050, was paid on a 25 year mortgage, £3774 would be paid off capital in the first year. With a 29 year mortgage, only £2578 is paid off capital. So, £1200 is left on the capital, for the sake of 4 years "breathing space", and attracting interest that needs to be paid. Each year this imbalance continues. 4 years of £1050 is £50,000. That you don't need to pay.

That's just for having a long term. This imbalance will be even worse if you switch to IO.

You acknowledge the IO plan will take you longer to repay the mortgage - when you already have a long term of 30 years. Making it a 35, 38 year term? This is going to be taking you into retirement territory, and that's before you decide you need to move house/upsize etc. That's another £50k to £75k more than you need to pay.

I doubt you will find a lender to convert to IO, "for a number of years", without an alternative repayment vehicle in place. If you can demonstrate such a repayment vehicle, you could redirect that at the CCs, being higher % rate than most savings plans.

Choosing to delay repayment will also slow the improvement of your equity position, and with house prices still fluctuating, the certainty that interest rates will not remain as benign as they are today, the possibility that IO will not be sufficient to dent the CCs, and the temptation to re-mortgage to release equity, I do hope you are not falling into the positon of your parents in 2008...

Thrugelmir

Even by moving onto I/o. You may find that your lender increases you mortgage rate by .2% for the priviledge.