Worth getting a loan to up equity ratio from 15% to 25%?

shez1981

I'm trying to work out the benefit of getting a loan to up the equity we have in our home from 15% to 25% in order to reduce the mortgage rate from 4.59% to 3.79%. I'm using my bank Lloyds on a 5 year fixed for comparison purposes.

To achieve 25% we'd need to borrow 12k to reduce level of mortgage from 105k to 93k on the basis home is still worth 124k (October 2009 purchase price). In fact we'd borrow 15k over 5 years in order to clear credit card balance of 3k (on a 0%).

Over 5 years we'd pay £290pcm loan repayments and £294pcm mortgage payments (interest only) a total of £584pcm which is similar to what we pay now on mortgage/credit card/bank of mum and dad repayments.

If we stay as we are on 15% equity we'd have to get a repayment mortgage and would pay £503pcm on a 35 year mortgage again first 5 years fixed and would also be paying off the credit card until that was cleared.

MY QUESTION IS: Based on the house still being worth 124k in 2019, we'd have 31k equity if we took the loan option, but how much equity would we have after 5 years on a repayment mortgage starting with 19k equity?

Any other constructive comments welcome.

Thrugelmir

Would you be extending your existing mortgage term in order to obtain a 35 year term?

PheoUK

My solicitor asked me where my deposit was coming from and made it clear they would tell the bank if I were trying to leverage myself with a loan

pjread

[QUOTE=PheoUK;[URL="tel:64650202"]64650202[/URL]]My solicitor asked me where my deposit was coming from and made it clear they would tell the bank if I were trying to leverage myself with a loan[/QUOTE]
Don't believe we're talking about a purchase here though, but a remortgage.

Interested to hear the answer myself, as contemplating something not entirely dissimilar to try o lower my rate on remortgage (although probably stoozing 0% cards, not a loan). I'm guessing remortgage makes this more viable?

shez1981

Thanks for responding. I'm currently with RBS having bought in 2009 so its a remortgage after the expiry of the initial 5 year fix. I'm not saying I will get the loan and/or mortgage from Lloyds but as I have my current account with them it was easy to get the interest rates to illustrate what I was asking. My mortgage with RBS is interest only at present.

fewcloudy

You have 3k on a credit card at 0% interest rate, but you intend to borrow 3k to clear that. Doesn't that just mean that you still owe the 3k, only now you will be paying interest on it?
I assume you have been told you HAVE to clear the CC in order to be allowed to remortgage?

fc

runforlife

What are the costs of your payments into a product to repay the capital part of the mortgage? Does this when added still mean that the repayment amount is still lower than the cost of the repayment mortgage?

Foxy-Stoat_3

I have thought about this in the past....I came to the conclusion that if I could afford a loan of say £10,000 @ £300 a month for 36 months for example I could afford to just over pay the mortgage by £300 a month.

If your one of these people (like me) who find it easier to pay a loan than to save the same amount then it might be a good idea as you would think of the loan as a bill. If anything unexpected happens you would just not overpay the mortgage that month, then the next, then the next and you get to Christmas etc etc, if you had the loan you wouldn't be able to not pay it, assuming you can afford to comfortably in the first place.

As to whether to saves money, probably not unless it actually allows you access to a better rate, but it would increase the likelihood of reducing your mortgage. As the mortgage is over 20+ years, you probably wouldn't actually see any real savings until year 10.

As for turning 0% interest free debt into a positive interest rate, I would try and pay down while its interest free.

pjread

Foxy-Stoat wrote: »

I have thought about this in the past....I came to the conclusion that if I could afford a loan of say £10,000 @ £300 a month for 36 months for example I could afford to just over pay the mortgage by £300 a month.

If your one of these people (like me) who find it easier to pay a loan than to save the same amount then it might be a good idea as you would think of the loan as a bill. If anything unexpected happens you would just not overpay the mortgage that month, then the next, then the next and you get to Christmas etc etc, if you had the loan you wouldn't be able to not pay it, assuming you can afford to comfortably in the first place.

As to whether to saves money, probably not unless it actually allows you access to a better rate, but it would increase the likelihood of reducing your mortgage. As the mortgage is over 20+ years, you probably wouldn't actually see any real savings until year 10.

As for turning 0% interest free debt into a positive interest rate, I would try and pay down while its interest free.

I guess the thing is that assumes you have 3 years to do it. if you're in the last year of a fix, at lets say 78% LTV, and can drop hypothetically 0.5 to 1% interest on remortgaging at 75% LTV or below.

I believe this is the OP's position and I can see the dilemma. e.g. even paying 10% on 10k (£1000/y) is "fine" if it saves you 1% on 200k (£2000/y), for example, as you're £1000 a year up on the deal. And if you can do it on 0% that's even better.

Doing it the "right" way works too, but it's 3 years down the line potentially, by which time you're been paying the extra £1000 a year each year, and may be locked in to a higher rate or be having a bad time on SVR and unable to get such a good rate.

MallyGirl

runforlife wrote: »

What are the costs of your payments into a product to repay the capital part of the mortgage? Does this when added still mean that the repayment amount is still lower than the cost of the repayment mortgage?

Good point otherwise you are not comparing like with like