Interest Only Mortgage To Clear Debts

DontWorryBeHappy

Hi

I have my mortgage with Bradford and Bingley. I currently pay £1600 per month and have 10 years left to pay. My house is worth £400000 and my mortgage is for £200000.

Because I am with B&B I have no option but to find a new lender if I want to change the terms of my mortgage.

I have approximately £20000 of credit card debt, spread over 4 cards, which I am repaying at a combined £500 per month, just over the minimum repayment amounts.

I have calculated that it will take me to 2017, at a cost of £20000 in interest, to repay all 4 debts at the current rate of repayment.

I am therefore considering remortgaging to an Interest Only mortgage for 2 years, which I believe will free up an additional £1000 from my mortgage payments, which I can use to increase the payments on my credit cards, which will result in the card debts being repaid in 2012 at a cost of £4000 in interest.

I have never missed a mortgage payment but might have missed one or two credit card payments over the last 12 months and may have exceeded the credit card limits. I do not have any CCJs and all credit card payments are up-to-date and all balances are now within the agreed limits.

Are there any reasons why I should not take this route? What are the chances of Lenders agreeing to my proposal? Is there a better alternative?

Any advice would be greatly appreciated.

Radionotme

Can you not ask B&B to increase your mortgage? You only have an LTV of 50%, and increasing it by £20k would still only take it to 55%, so shouldn't have a material affect on your loan.

That way you can pay off credit cards straight away, and then just focus on the mortgage?

getmore4less

missed/late payments in the last 12 month and going over limits and just min payments suggests you dont have your spending under control yet.

How long have you been overspending? whats the average overspend per month?

Do a propper budget before cosolidating your debts into secured and then building them up again after the easy way out.

Get your credit files to have a look at how bad your missed payments have made it.

Whats the income multiple for a £200k+ loan?

nrsql

The problem with doing what you suggest is that you are transferring debt from the credit cards to the mortgage (whether you go the interest only route or the increase lump sum route).
This might be a good idea as the mortgage should be a lower rate than the credit card.
But it will give you debt free credit cards and the possibility of building up more expensive debt - in a few years time you may want to do the same thing again. This continues until you can't sustain the mortgage payments let alone creadit cards - increase in the mortgage rate will probably come into play too. It starts when you celebrate (expensively) paying off the credit cards.

So yes this would be a good idea but only if you change your habits and live within your means - and by that I mean that you allow for unexpected expenditure and don't try to spend every penny you have left over each month - with that sort of mortgage I would expect to maintain a couple of thousand in savings as a buffer.

shortchanged_2

To have any chance of getting an IO mortgage you would need to have firm proof of a repayment vehicle in place.
Most lenders these days are very reluctant to give IO mortgages and rightly so.

Obviously you realise that after 2 years of an IO mortgage that your repayments would then be bigger or you would have to take the mortgage out over a longer period to keep the payments at a lower level.

DontWorryBeHappy

Radionotme wrote: »

Can you not ask B&B to increase your mortgage? You only have an LTV of 50%, and increasing it by £20k would still only take it to 55%, so shouldn't have a material affect on your loan.

That way you can pay off credit cards straight away, and then just focus on the mortgage?

Bradford and Bingley were nationalised in 2008 and as a result are closed to new mortgage business and are unable to offer new mortgages or further loans.

I would be more than happy to stay with B&B if they were able to change my mortgage to an Interest Only mortgage for 2 years....but they can not/will not.

DontWorryBeHappy

getmore4less wrote: »

missed/late payments in the last 12 month and going over limits and just min payments suggests you dont have your spending under control yet.

How long have you been overspending? whats the average overspend per month?

Do a propper budget before cosolidating your debts into secured and then building them up again after the easy way out.

Get your credit files to have a look at how bad your missed payments have made it.

Whats the income multiple for a £200k+ loan?

I do have my spending under control now. Every payment, down to my £2 per week lottery ticket, is logged in to Microsoft Money and this is being adhered to religiously.

I have checked my Credit Score with Equifax this morning. My score is 442 (Good).

I have no idea what the income multiple is on a £200k+ loan but the combined salary of myself and my wife is £125k+ so it shouldn't be an issue.

DontWorryBeHappy

nrsql wrote: »

The problem with doing what you suggest is that you are transferring debt from the credit cards to the mortgage (whether you go the interest only route or the increase lump sum route).
This might be a good idea as the mortgage should be a lower rate than the credit card.
But it will give you debt free credit cards and the possibility of building up more expensive debt - in a few years time you may want to do the same thing again. This continues until you can't sustain the mortgage payments let alone creadit cards - increase in the mortgage rate will probably come into play too. It starts when you celebrate (expensively) paying off the credit cards.

So yes this would be a good idea but only if you change your habits and live within your means - and by that I mean that you allow for unexpected expenditure and don't try to spend every penny you have left over each month - with that sort of mortgage I would expect to maintain a couple of thousand in savings as a buffer.

Agreed that this is a real danger. However, as stated already, we have given ourselves a real good speaking to and do now have things under control.

I have no chance of building a buffer unless I can free up the cash by switching to an Interest Only mortgage or, as I like to think of it, switching to paying rent for 2 years.

DontWorryBeHappy

shortchanged wrote: »

To have any chance of getting an IO mortgage you would need to have firm proof of a repayment vehicle in place.
Most lenders these days are very reluctant to give IO mortgages and rightly so.

Obviously you realise that after 2 years of an IO mortgage that your repayments would then be bigger or you would have to take the mortgage out over a longer period to keep the payments at a lower level.

We both have very good personal pension schemes. Would these be acceptable vehicles for proof of capability to repay?

My intention would be to replace my 2 year IO mortgage with a repayment mortgage over 8 years, 2 years less than the 10 years remaining on my current mortgage, so as to keep my target mortgage completion date the same as it is today. The £500 I currently pay out on credit card payments should more than cover the increased mortgage payments, depending on what the interest rate is at that time.

shortchanged_2

DontWorryBeHappy wrote: »

We both have very good personal pension schemes. Would these be acceptable vehicles for proof of capability to repay?

They would want proof that you would be able to pay off the capital at the end of the mortgage term in a lump sum. So for example if you went IO from now to the end of the mortgage term they would need to know that you would have £200,000 available at the end of the mortgage to pay off the capital.

Therefore I would assume your pension is not a suitable repayment vehicle unless it gives you a large lump sum on retirement.

getmore4less

DontWorryBeHappy wrote: »

I do have my spending under control now. Every payment, down to my £2 per week lottery ticket, is logged in to Microsoft Money and this is being adhered to religiously.

I have checked my Credit Score with Equifax this morning. My score is 442 (Good).

I have no idea what the income multiple is on a £200k+ loan but the combined salary of myself and my wife is £125k+ so it shouldn't be an issue.

Score is no good to you need the detailed reports £2 each and have a chat with a broker on the effect

With a joint monthly take home of £6500-£7000

I would have a closer look your spends mortgage is £1600 and you are only managing £500 CC payment that leaves a lot going out on something.

With this level of spends you could use 0% purchase credit cards to get rates cheaper than the mortgage

Long tem you need to be spending less than this to save up for purchases and retirement planning so why not start now

Going back to the current mortgage

You say £1600pm on £200k over 10 years, that's not possible
0% interest that would be £192k. B&B must be charging something?
I would have expected something nearer £2kpm

Salary multiples and LTV are OK but the CC record might be too recent for a lender to be interested. Will B&B extend the term?

Do you have other assets that you could use to pay off the high cost CC.
eg : runing an expensive car
or large one off like a holidays that could be delayed or done more cheaply


we have given ourselves a real good speaking to and do now have things under control.

gone from over spending to min payments on relatively(3mnths net) small debt, not that serious a chat.

Fancy postng your SOA to for some comment on potential cutbacks?
Have you reduced your mobiles
reviewed TV packages
running value cars
analysed utitities
cash back on insurane
etc.

End of the day it is upto you how you prioritise but your current dependancy on this level of income is a serious risk.

I would have thought with a full cash flow analysis, some cutbacks/delayed spends along with a 0% purchase card you clear this £20 in less than 18 month without touching the mortgage and have a lot of it a 0% for much of that time.