Interest only mortgage to help pay existing debt??

novice_money_man

Hi all,
Just looking for a bit of advice if possible......here goes:

Over the past 5 years I have accrued debts of 21k due to a poor salary and if I'm honest a bit of living beyond my means. Over this period I have never missed a payment and after checking my credit score I was just below the very good bracket. I have recently started a new job with a much improved salary and I want to get rid of this debt.

My dilemma is that my mortgage is due for renewal in September and I was wondering if it would be worth switching to an interest only mortgage for 18-24 month to allow me to completely clear the outstanding debt (and do mortgage providers allow you to do this??). I would have usually just switched balances of credit cards to 0% ones but due to the amount of debt nobody has been forthcoming in offering those deals. I also don't want to start applying for credit cards due to the effect it has on your credit rating.

If anyone has any advice it would be much appreciated.

VT82

It is unlikely they will allow you to switch to interest only. Mainstream lenders now want to see repayment vehicles in place before they will do this, and new borrowers are charged a higher rate if they apply for interest only mortgages than for repayment mortgages.

Your mortgage might go down anyway if you are coming off a fix, or you might be able to switch to a lower fix then?

Well done on the new salary by the way.

novice_money_man

Thanks for that. I have been on a 5 year fixed (which I think was between 5-6%). Is the best person to go and speak to a mortgage broker then?? And thanks again!!

opinions4u

1) Forget the interest only plan - that is basically a way of moving your unsecured debt on to your mortgage and then being charged interest on it for the remaining term.

2) Do see a broker, probably in the next 3 or 4 weeks, with a view to negotiating a better deal on a repayment basis from September.

3) Focus on paying down the most expensive unsecured debt first - and be disciplined in not spending on the cards or taking out any other forms of credit.

VT82

There's only any point going to a broker if you need a new mortgage, and you might not. A new mortgage means lots of fees, and will depend on you being accepted in what is a very different climate to what you experienced when you were offered your last one.

It depends what rate you will revert to. It is likely to be less than your fixed rate as only some Building Societies and specialist lenders still have standard variable rates over 5%. With any luck, it might even be reverting to a base rate tracker such as base + 1.99% (i.e. 2.49%).

To find out, check your original offer. If it says it will revert to the standard variable rate, either ring your lender to find out what that is, or post which provider you are with on here and someone will probably be able to tell you. Once you know the facts, you will be in a position to know what to do in September.

_Andy_

Property value (realistically)?
Amount owing on mortgage?

novice_money_man

Cheers everyone. I work away from home so will find the information when I get home on thurs and post it. My current mortgage is with Northern Rock.

VT82

Northern Rock would have been an educated guess seeing as you were probably not the best candidate for a mortgage five years ago (no offence).

I think their SVR will be 4.79pc so you will save a little bit (don't know if they did mortgages reverting to base rate trackers). In this case, knowing your estimated house value and current mortgage size will actually be useful rather than just nosey.

novice_money_man

None taken!! Very nice of you lot to take the time to give me some advice, I really don't know how I afforded a mortgage back then. So do you need to know how much I have left outstanding on the current mortgage and house value??

Bikerchicken

I personally wouldn't go for interest free. I was in a similar position a few months ago and at the time thought it was a really good idea to do this... I was shown the error of my thinking and am so greatful, as I think interest only would have given me sleepless nights.
I went for an advancement on my mortgage which is not for everyone, but I have had my light bulb moment, got myself sorted and am currently working towards being in a position to overpay the advancement/mortgage.

VT82

novice_money_man wrote: »

None taken!! Very nice of you lot to take the time to give me some advice, I really don't know how I afforded a mortgage back then. So do you need to know how much I have left outstanding on the current mortgage and house value??

Now that you have a good salary, as long as this compensates for the outgoings on your credit cards, the biggest obstacle in getting a better mortgage with someone else will be the loan to value. It doesn't sound like you have savings, so you will need your house to be worth a significant amount more than the mortgage. If the house is worth 25% more than your mortgage, you should be able to get an 80% loan-to-value mortgage with someone else. This will mean it will be worth getting off the Northern Rock standard variable rate.

You probably won't be able to go interest only (having a 35 year repayment mortgage is pretty much the same thing anyway - you should be able to get one if you are under 30), but if you can get your rate down, you will save money each month to pay off your credit cards. If by some miracle you have a lot of equity, you could borrow more to pay off your credit cards, but you should really try to overpay your mortgage by what you would have paid on your credit cards, otherwise you will be building up the interest on the credit card debt over a longer term.

So double check what rate you will revert to, and if you think you have some equity in your house, go and see a mortgage broker.

And don't go racking up the credit card debt next time