Is capitalisation a good thing?

typical_blonde

Help! Need a grown-up who understands these things. We have a mortgage with GE Money and fell into arrears. We are now paying off the arrears monthly alongside our regular payments. The mortgage is an interest only mortgage.

The other day someone rang up from GE Money and told us that we could 'capitalise' the arrears and interest and it would be added to the final sum. This would increase our basic monthly payment but it would be cheaper than the amount we are paying at the moment when you take the arrears into account.

OH and I disagree whether we should do it or not. Any suggestions?

MoreOn

cheaper in what way? They need to advise appropriately...Ask what the total amount payable it....

If you're not clocking up penalities, paying more now may be cheaper...
If you capitalise the arrears, monthly payments might be lower, but the final amout paid could be FAR more expensive...

Thrugelmir

Without numbers its difficult to tell what they've offered you is beneficial.

The downside would appear to be that you would clear the arrears over a far longer term. Thereby paying far more in interest. So while you benefit from a lower monthly outgoing , GE makes more money out of you.

Wh05apk

Thrugelmir wrote: »

The downside would appear to be that you would clear the arrears over a far longer term.

The mortgage is interest only so the arrears would not be cleared, they are simply being added to the mortgage, and you will pay interest on them, no doubt you will be reducing your current monthly commitment.

As an aside, do you have anything in place to repay the mortgage, or are you simply hoping for a lottery win/inheritance?

silvercar

The advantage would be that the arrears disappear, so don't show as a black mark on your credit rating and your lender can't become difficult about them.

The disadvantage is that once capitalised you have a larger mortgage. Over time it will cost you more in interest than clearing them quickly and your loan to value ratio increases so it may be harder to get a good mortgage deal if you plan on remortgaging.

As you say, in the short term it is cheaper, but in the long term you would have paid more.

Whether it is worth doing depends on how manageable you payments are and whether you could do with the breather this will give you.

If you are in the unfortunate position of having arrears again in the future, you will be grateful that this lot have been capitalised and so are out of the picture. It would certainly start the clock again in terms of repossession if you got into a financial mess.