Adding Mortgage Reserve to Mortgage

agarnett

IMPORTANT: As getmore4less urges, don't ask for your repayments to increase because that will almost certainly be used by Barclays/Woolwich to pay off your low interest borrowings on the main mortgage without reducing the Reserve balance owed at all.

Instead, you could simply create a standing order to pay a regular amount of your choosing into the Mortgage Current Account. In this case, just treat the Reserve like an overdraft you need to get rid of, except unlike an overdraft, you don't have to get rid of it all until the end of your mortgage, and the interest rate on it is still much cheaper than any overdraft.

I hope this is not going to be bad news for you, but indulge us please with a little bit more information on what you are currently paying.

Reading your posts again, I am concerned that your standard mortgage payment is only £150 per month ? Or is that an extra amount that you had been paying to try to get rid of the Reserve balance? Sadly £150 per month would be nowhere near enough to pay off even the original £35,000 mortgage. Maybe I misunderstand, or maybe you have one of those dodgy "Interest Only" mortgages which can be dangerous for the unwary who have forgotten that not only must they pay the agreed montly payments to cover interest on the original loan, they also need a separate plan to pay off the original capital borrowed.

It is true that £150 is much more than the monthly Interest Only on £35,000 at 1.45%pa (that's only £42 per month) but maybe after the Base rate dropped 5 or 6 years ago, you agreed to keep paying the same monthly payments you'd been paying in the earlier years of the mortgage?

10 years is of course only 120 months.

120 months x £150 per month = £18,000 (eighteen thousand, ONLY - and, looking at it from the other end of the telescope, that does not even allow for payment of interest during the remaining term).


Actually, I've just re-read the thread yet again and now picked up the OP's disclosure, right at the beginning, of "Other Debts".

Fact is, that even at a current interest rate of 5%, the Reserve is likely to be a relatively low interest debt problem. Sure, it needs to be paid off inside 10 years, but "Other Debts" e.g credit card debt or personal loans are likely to be at rates much higher than 5%, and for example, a continuous credit card debt of £2,500 - 3,000 could easily be "stealing" £50 per month in unnecessary extra monthly interest which could be better used in reducing the debt itself.

So if the OP has found extra cash they can pay monthly toward existing debt then the "Other Debts" should almost certainly be eliminated first before trying to pay off any aspect of the mortgage beyond the minimum payments required of them.

But there are a lot of unanswered questions about the OP's overall financial situation here, so I would very much recommend that the OP goes over to the Debt-Free Wannabe board and seeks more comprehensive advice over there.

For example, the OP does not say whether the Reserve is maxed out. If it isn't yet maxed out then it could be a welcome opportunity to consolidate "Other Debts" at a relatively low interest rate over a 10 year period. So if "Other Debts" are at high interest rates, it may even be sensible in the medium term (over the next couple of years perhaps) to transfer the Other Debts to the Reserve, ... yes making the Reserve even bigger ...

I have heard of people having these Reserve facilities at what are very useful relatively low interest rates, but nevertheless taking out and building up unwieldy overdrafts on other bank accounts, and credit card debt, and wasting exhorbitant interest money monthly on those types of "Other Debt" without realising they could still use their Reserve to help them pay off those other debts much more efficiently and so faster.*

So OP, do share some more here if you like, and the commentators so far may be able to comment more precisely on how to use your Reserve from this point on before sending you over to DFW.

With sundry debts with different types of lender, it is always essential to keep your eye on the ball as far as the individual interest rates are concerned, and as Martin has urged for years on this site, you should always seek to reduce the high interest debts first.

But before plunging into a new payment regime, the OP's whole debt problem needs looking at carefully.

*Despite what I have said about making the Reserve even bigger if the OP still can, it never used to be seen as a good idea to consolidate unsecured debt such as credit card or overdraft debt into secured debt such as the Mortgage Current Account Reserve. I don't know the current thinking on this.

Take as much advice as you can get OP ...

YORKSHIRELASS

Thank you.

The Mortgage Reserve is treated as entirely separate from our main mortgage - in fact Barclays call it an overdraft and you dont even have to make regular repayments towards it if you dont want to. Our Maximum Reserve borrowing is £32k. This is where the repayments of £150 are going.

We pay an additional £348 a month to our main Mortgage of £35k so £500 in repayments in total.

Our other debts are just under £15k on 3 credit cards at 0%. We continually shuffle these to keep the rates at 0% and are paying off as much as we can. There is an argument of course for clearing these first and concentrating on the Reserve later but I would prefer to be reducing the balance on the Reserve now.

Mind you, if we paid nothing off the reserve for 3 years and paid the money off the cards instead we would only need to increase the reserve payments to £282 to clear it in 7 years but is this a good idea? Maybe something to ask on the DFW board.

agarnett

Hi again OP!

Glad to hear everything is actually still on some kind of decent track.

Yes, even though you've managed to juggle credit card debt at 0%, there is still some kind of argument as you say for clearing that debt first or at least for saving up a barrel of cash in order to pay them off completely before your juggling becomes difficult and you suddenly drop into some 15% or 20% or higher rate with it. That would be disastrous.

On the other hand, that "0%" money is costing you 0% going forward so the opposing argument says until you get to the end of the 0% deals, pay off your Reserve which is at 5% currently. And do your best to set up further 0% deals.

Your 0% credit cards almost certainly will not actually have been "0% cost", because they'll have cost you a "handling fee" up front. I am sure you will have been factored in as a cost of borrowing to compare with the interest on your Reserve for example. You've paid those upfront credit card borrowing fees now, so if it was me, I would be tempted to keep that £15,000 debt there and try to keep juggling a bit longer whilst I reduced the Reserve balance.

The reason I saw this thread in the first place was your mention of Barclays Reserve. And there lies a possible rub ...

I had heard recently that Barclays may be reducing existing reserve limits. Other commentators including getmore4less have said they have actually done it before.

You are using £20,000 out of a possible £32,000 reserve at the moment. As you almost certainly already realise, that unused £12,000 could be a safe port in a storm if you can't find another low interest balance transfer next time you try to juggle some credit card debt. But if Barclays take it away, then you are much more vulnerable.

The Reserve will have been, up until now at least, a useful longer term "no permission required" credit facility and so long as rates don't increase too dramatically and so long as Barclays don't remove it or reduce it, then it will remain so.

Getmoreforless says that when Barclays/Woolwich reduced Reserve limits in the past, he never heard of them reducing a limit below that which was being used.

Just another ball to keep your eye on I guess!

Anyway, good luck with smashing into the £20,000 and the £15,000 which sound like the potentially troublesome bits. There has never been a better time (except starting 5 years ago!) for paying down debt when your main debt is essentially mortgage debt.

You say that your Reserve is entirely separate to your Mortgage. Well in some obvious ways yes. But the beauty of it is that it is very much linked to your mortgage in terms of your continuing permission to use it as a flexible 'use it when you want', low interest credit facility, for the next 10 years in your case. Guard it jealously, and don't be afraid to use it if you can't find low interest balance transfers next time round with your credit card debt.

Without the fallback of the Reserve, it is of course your credit card debt that might easily sink you if you couldn't find another low interest deal. Remember, (and I am sure now that you know this) the monthly interest alone on a £15,000 credit card debt could easily be £230 per month even at a 'normal' ('orrible rip-off actually!) 20% pa rate (which translates to over 1.5% per month!).

So then, over to DFW for belt-tightening ideas while interest rates stay low enough for you to eat into debts ? ... or

... a continued mixture mixture of clever borrowing, gambling, optimism and realism that I think many survive on thesedays, now aided by a government that is trying to tempt us to cash in our pensions early ... what's that all about ?

getmore4less

0% cost every time you move them.

The most cost effective is likely to be min payment on the 0% CC and max out the payments to the reserve.

Review the 0% when they finish either new 0% or move back to the reserve.
Also look at 0% purchase cards and use that to reduce the reserve on a temp basis

The key will be what you spend, that needs a serious review to bring you back on track.

Make sure you monitor all letters from Barclays for any changes to the reserve.

YORKSHIRELASS

Thank you, those are both really helpful posts. We have pared everything back to the bone and are throwing every penny at the credit cards at the moment.

Of course the big difference with the cards is that if we ever reached the stage where we couldnt pay them it wouldnt be a good situation, but we wouldnt lose our home. The thought of getting nearer to the end of our mortgage term and not having a way of clearing that reserve is much more scary. 10 years sounds like a long time but in reality its not.

Interestingly we have just had an account review with Barclays and they told us to keep our £2.5k overdraft in case of a dire emergency - although we never use it any more. They said that this kind of lending just doesnt happen any more and any borrowing you have available is worth hanging on to.

There is a lot of uncertainty with whichever way we play this. I long for the day when we dont have any debt but thats not going to happen any time soon.

Again, thanks for your valuable advice.

Thrugelmir

YORKSHIRELASS wrote: »

Our other debts are just under £15k on 3 credit cards at 0%. We continually shuffle these to keep the rates at 0% and are paying off as much as we can.

What's your plan B. Credit card lending is in the sights of the FSA. RBS have already withdrawn totally from the 0% market. Longer term there might well be no where to shuffle to.

YORKSHIRELASS

Thrugelmir wrote: »

What's your plan B. Credit card lending is in the sights of the FSA. RBS have already withdrawn totally from the 0% market. Longer term there might well be no where to shuffle to.

Thank you. Plan B is to add the cards to the mortgage reserve if we still have that. Plan C is to add the cards to the mortgage if thats possible. Hopefully we will have reduced the cards significantly before this is necessary. None of this is ideal but when you are in debt I guess its a case of just doing what you can.

agarnett

YORKSHIRELASS wrote: »

Interestingly we have just had an account review with Barclays and they told us to keep our £2.5k overdraft in case of a dire emergency - although we never use it any more. They said that this kind of lending just doesnt happen any more and any borrowing you have available is worth hanging on to.

Now therein was actually some good advice from Barclays. Any borrowing facility you have available being worth hanging on to I mean (without necessarily using it until you need it).

I think in your case that especially includes the Reserve. Should you receive any indication that it is planned to be reduced, then I don't think there is anything preventing you maxxing it out while you still have it. In your case, "prevention" by tactically using it all is perhaps better than the "cure" of having to apply for new credit because your old credit may have been given up. It is not a 0% credit line, but at a current 5%, it is still a very very useful credit line to keep for the next 10 years. I don't mean keep using, so much as keep available!

If you chose to borrow that last £12,000 in your Reserve, it would currently cost just under £50 per month in interest, for example, i.e. perhaps 4x or 5x cheaper than a 'normal' credit card debt.

The advice to try to hang on to existing credit lines may also include any credit cards that may have 'never-to-be-seen-again' high limits, especially with the likes of Barclaycard, who still come up with promotional deals for existing customers from time to time.

For the past five years or more there has been a lot of advice in these forums about closing existing accounts to assist your chances of opening new ones. I am not entirely convinced that tactic is right for everyone, especially if you are not planning to move or remortgage in the near future.

And finally, I would say that if you have any cards you haven't been using lately, especially those with high limits which never seem to have a promotional offer these days, do remember to put a transaction or two through them in an attempt to keep them 'alive' for the day you may need them in an emergency. Use it or lose it perhaps? Again, I have not seen such advice on these forums, but in recent years I have lost credit card credit limits cumulatively greater than my mortgage balance simply by allowing them to become dormant and closed involuntarily.

It is generally good advice to tighten your belt as much as possible to pay down core long term debt while the sun shines on low interest, but maintaining existing credit lines (without necessarily using them constantly) for possible more urgent use on a rainy day is I think equally good advice.

Credit lines can cripple you if mismanaged, but they can also give you real choices and buy you time in times of crisis if they are well understood and you are well disciplined.

YORKSHIRELASS

Thank you so much for your advice. What we have been doing is when we move debts from one card to another we leave say £300 on the old card and then pay just over the minimum. This costs us a little in interest but keeps the card live and means that the card company keeps trying to tempt us back with 0% offers.

Between us we have 5 credit cards, 2 of which have very small balances so we have some scope for moving things around when necessary. I do appreciate that this plan may not work for ever and the 0% offers may eventually dry up.

What you have helped me to see is the real value of the Reserve and the possibilities that it might offer us in the future. I will now keep an eye on this more closely and watch out for any changes.