Debt problems- should I use home equity for business or to pay off debt?

simon20_08

Hello all,

After some recent problems I've managed to get myself into debt over the last couple of years, to the sum of roughly £18,000 This is spread over an overdraft, credit cards and a loan....
I'm 29 years old and want to clear it sooner rather than later.

I do however have my house as an asset, which currently is rented out with tennants covering my mortgage costs (I myself am living in shared, rented accomodation). The mortgage is currently £131,000 and local estate agents recently valued it at £175,000 - demonstrating potential equity of £44,000. This of course is all dependant on someone being willing to pay that figure in this current climate (although I'm assuming the estate agents would have considered this). I'd expect if it did sell it would go for £170k & minus the costs of sale at around £3k, it would leave £36,000 equity.

What I would appreciate advice on is this; Before I stupidly got myself into debt I'd earmarked the equity in my house to put toward the purchase of a business, to change my life & do what I've always dreamt of - being my own boss..... Obviously I am fortunate to be in a position to clear off all my debt with the sale of my home, (and I have no intention right now to buy another property, im happy renting & have little confidence in the long term performance of property prices anyway) - but I am wondering - if I use the lion's share of the equity to pay off debt, I won't be left with much to invest in a business. I know this sounds risky, but one option I considered was taking most of the equity and buying an existing business (like a small cafe or shop with proven accounts) and using the ongoing business returns as my method of repaying the debt (which would be much quicker than I can afford with my current pay cheque.... risky I know!

However another thought I had was not going into business and using the equity lump sum for an alternative option, of simply buying and selling 'stuff' (whatever that may be! legal too, of course) For example, buy a car at auction for £8k and re-sell on autotrader for £8.5k or 9k - not trying to make too much on each transaction, but just enough to make additional payments in clearing my debt, whilstkeeping my day job. Any thoughts? again, I know there is risk involved depending on what I sell - but what about the theory of it? Making the money 'work' for me....

The final option - and most sensible, I know - is to simply pay everything off and leave me with £18k instead of £36k.....

Any feedback that anyone has would be most welcome. Thank you for taking the time to read my rambling thoughts!

Simon

RAS

Hi

We ned a proper Statement of AffaIRS TO WORK OUT HOW YOU COULD PAY THis off. It may not be that much of a problem.

mostlycheerful

Hello,

(1) Using house equity.
Your house is an asset and an achievement so, yes, you could cash it in and invest it in trading but that would be converting a relatively stable investment into an unknown situation. So I would tend to feel that in general it’s better to hang on to what you’ve got rather than risk it. You can start trading in the evenings and weekends and you can start with small amounts of money and test out if you can do it and work your way up to a bigger thing later. It would be a shame to sell the house, try trading then just lose the money, which is easily done, especially when you’re new to it. Better to start small and keep it safe than to be too ambitious and risk losing it all.

An alternative could perhaps be to remortgage to release the equity but whereas for some people borrowing house equity is useful for some people it’s not and can be an extra unsustainable cost. As I’m sure you realise, if you default then you can lose the house and be repossessed and or go bankrupt and such like. So it’s a risk. It’s a bit like digging under the foundations or eating your own foot so it’s a serious matter.

Spending your equity to clear the debts would be an achievement except that unless you change your usual spending habits you may simply then run up the debts again and take two steps back for the one step you took forward. Consolidation is mostly thought to be a bad idea as most people who consolidate usually then carry on the previous spending habits and run up the cards and overdrafts and loans all over again and dig an even deeper hole and get themselves into an even worse pickle. If you search for “consolidation” on this site you can read people explaining why consolidation is a mistake for 90% of people and why you shouldn’t do it.

Converting unsecured debt to secured debt is definitely a bad move and bad business practise any way you look at it and is to be discouraged. That’s definitely pointing yourself in the wrong direction.

(2) Shop or cafe and or used car trading
Yes, shops, cafes and used car trading can all make good money if you put the work in and if you’re any good at it. These are all skills and learning curves and if you’ve got what it takes then it can be lucrative. Of course also some people try these and don’t make money and sometimes lose money. So it’s a bit of a gamble and a risk. But so are most things in life. So nothing ventured nothing gained, no pain no gain, you have to speculate to accumulate. There’s only one way to find out if you can do it and that is to try it and see. So go for it, it could be the right thing for you.

And if it goes wrong, well, at least you tried. Lots of people fail in business and many of them bounce back so even if you do lose the money and go down the pan you can still work your way back up again and try again. Don’t necessarily expect immediate success, a lot of people have to spend a few years and a few attempts before they crack it and get into their stride. But you’ve got to start somewhere and you only live once so give it a go, it could be good. There’s nothing quite like doing it for real to get the real experience.

Auctions have various aspects to consider to so go to some and see how it works and maybe buy some cheaper ones before risking £8k. Used cars are notoriously dodgy so you need to keep your wits about you and learn what it's all about and in particular how to avoid the pitfalls and scams. And, of course, don’t go to meet a stranger off the net with £8,000 cash on you as you can get robbed and it does happen. Be careful and take precautions, go slowly and cautiously, a fool and his money are quickly parted and it’s dog eat dog out there, caveat emptor, due diligence and all that.

Perhaps could you start by trading £500 and £1,000 cars to get the feel of the market and then work your way up to something bigger as you get the experience and feel of it as £8k is quite a lot to risk on a first trade for buying and selling used cars. It would be a shame to lose it just from doing a beginners’ mistake or bad luck, wouldn’t it.

Similarly would it be appropriate to go and run some market stalls on Saturdays and Sundays for a few weeks and get the hang of retail sales before considering taking on the larger commitment and responsibility of a shop or cafe? Some practice and market research and experience would put you in a better position to assess the viability and your suitability for taking on a bigger project. You can get started on a market stall with an outlay of just a few hundred quid or maybe a grand or two so you don’t have use all your equity all in one go at the start. So perhaps do a cheaper simpler pilot project or two and test the waters before you try risking and turning over all your equity.

Sales is right for some people and not for others. So try yourself out, if you’re good you can make money. If you’re not very good or you lose money, well, at least you tried. However, don’t risk the house much or at all if you can help it. Try to finance your trading off your wages, not off borrowing as if you use your own cash to grow your business then that is more sustainable than borrowing and paying interest. If you operate within your cash flow then you can keep going in any eventuality whereas if you operate outside of your cash flow and take on additional borrowing and risk then you are straight away putting demands on yourself and the business which could be your undoing if you borrow too much and it’s unsustainable. Hope this is of use, good luck.

simon20_08

Sorry for such a late reply - thank to both who have posted, I appreciate your feedback

Right now, I have postponed any thoughts on what to do in the future as a business or trading, whatever. All I would love to do is get back to owing NOTHING & never getting in this mess again. It's so frustrating as I feel like I am spiralling out of control.... My property that I own has tenants in until next September, so I can't even think about selling it right now. I am over the 85% LTV for re mortgaging, so I can't even do that to clear some debt. What would you suggest, I hang on treading water until I can sell it? I tried a few months back and it didn't get a sniff of interest in the current property market So, I lack confidence it'll ever sell....

I am servicing debt at approx £700 a month (!!) so I am wondering whether a consolidation loan would be an answer - to at least reduce my outgoings servicing debt and then cut up all the credit cards I have! However, I did spiral into a circle of applying for debt a while ago to the point where my bank who i've been with for many years rejected me for a small £1000 loan.... so like I say, I'm wary of re-applying for another loan incase its rejected and stains my credit rating even more. By the way, I have NEVER missed a payment in servicing all my debt - and my recent Equifax report a couple of months ago put me in the 'good' category for my credit rating :S Another piece of info, I recently applied for a Platinum Barclaycard for their 0% balance transfer offer for 16months and was pleasantly surprised to be accepted. Does this mean my rating may actually be good again, or just that Barclay's are hungry for my debt when the offer period ends?!! Ha.

Any advice you can suggest would be much appreciated.

Here is my statement of affairs:

Statement of Affairs and Personal Balance Sheet

Household Information
Number of adults in household........... 2
Number of children in household......... 0
Number of cars owned.................... 0

Monthly Income Details
Monthly income after tax................ 2250
Partners monthly income after tax....... 0
Benefits................................ 0
Other income............................ 0
Total monthly income.................... 2250

Monthly Expense Details
Mortgage................................ 423
Secured/HP loan repayments.............. 0
Rent.................................... 480
Management charge (leasehold property).. 0
Council tax............................. 0
Electricity............................. 0
Gas..................................... 0
Oil..................................... 0
Water rates............................. 0
Telephone (land line)................... 0
Mobile phone............................ 30
TV Licence.............................. 0
Satellite/Cable TV...................... 0
Internet Services....................... 0
Groceries etc. ......................... 150
Clothing................................ 25
Petrol/diesel........................... 0
Road tax................................ 0
Car Insurance........................... 0
Car maintenance (including MOT)......... 0
Car parking............................. 0
Other travel............................ 50
Childcare/nursery....................... 0
Other child related expenses............ 0
Medical (prescriptions, dentist etc).... 0
Pet insurance/vet bills................. 0
Buildings insurance..................... 12
Contents insurance...................... 0
Life assurance ......................... 0
Other insurance......................... 0
Presents (birthday, christmas etc)...... 20
Haircuts................................ 12
Entertainment........................... 200
Holiday................................. 0
Emergency fund.......................... 0
Total monthly expenses.................. 1402


Assets
Cash.................................... 0
House value (Gross)..................... 170000
Shares and bonds........................ 0
Car(s).................................. 0
Other assets............................ 0
Total Assets............................ 170000


Secured & HP Debts
Description....................Debt......Monthly...APR
Mortgage...................... 131000...(423)......2.5
Total secured & HP debts...... 131000....-.........-

Unsecured Debts
Description....................Debt......Monthly...APR
natwest credit card............4750......109.......18
barclaycard....................4500......70........0
hsbc...........................3800......90........19
loan...........................1200......180.......14
overdraft......................4600......80........17
nationwide.....................500.......40........20
Total unsecured debts..........19350.....569.......-


Monthly Budget Summary
Total monthly income.................... 2,250
Expenses (including HP & secured debts). 1,402
Available for debt repayments........... 848
Monthly UNsecured debt repayments....... 569
Amount left after debt repayments....... 279

Personal Balance Sheet Summary
Total assets (things you own)........... 170,000
Total HP & Secured debt................. -131,000
Total Unsecured debt.................... -19,350
Net Assets.............................. 19,650


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