Home Equity v Mortgage Affordability

Paxman

Hi - am hoping that somebody can help us out with some advice on the following.

We own our house which is worth £150k and we have an outstanding balance on our existing mortgage of £60k. We have a secured loan with approx £4k outstanding balance but £43k of credit card (unsecured) debt. We have just spoken to our current mortgage provided to discuss the potential for extending or changing the mortgage to enable us to purchase a house worth £300k with a 10% deposit. Based on our income they would be prepared to lend us £270k IF we didn't have the credit card debt. With it, they will only lend £67k!!

Obviously we have the equity in the house, based on a valuation of £150k to:

1. Pay off the current mortgage - £60k
2. Pay off the secured loan - £4k
3. Pay off the credit cards - £43k
4. Fund a 10% deposit - £30k

and still leave us approximately £13k to cover moving costs, solicitor's fees etc.

Unfortunately in spite of being able to demonstrate that we can pay the cost of the additional mortgage (we are currently paying £1700 a month to the credit cards + £500 to the current mortgage), once we've paid off the credit cards etc, the bank won't lend because they make the decision based on our current situation. We can't extend the current mortgage to cover the unsecured debts and they won't commit to a mortgage even if we consolidated the current unsecured credit card debts into a loan secured against the property that would be redeemed in any sale.

So we can demonstrate that we can afford the additional mortgage borrowing (even if rates rise) based on our current income/expenditure but fail the 'affordability test' applied by our lender. The best solution the Bank could come up with was for us to sell our current house and move to rented accommodation, use the funds to pay off the debts and then make a further mortgage application from fresh. Given that we have three kids in primary school, this is a pretty risky strategy, leaving us committing to pay rent for a period whilst trying to arrange the purchase of another house.

We wouldn't consider borrowing from family but any other suggestions about how we could break the deadlock would be very much appreciated.

TrickyDicky101

Hi

I realise this doesn't address your question (have to leave that to others more knowledgeable than I), but how did you run up such big credit card debts?

kingstreet

You are going to repay the card debt from the sale proceeds. This would be fine with most lenders.

It would be helpful if you could tell us which lender you are talking about, so we can understand the perspective...

Santander? It assumes any repaid credit will be re-drawn, so assumes the payments will continue.

Have you spoken to anyone outside this one particular lender, like an independent broker?

Thrugelmir

Paxman wrote: »

We wouldn't consider borrowing from family but any other suggestions about how we could break the deadlock would be very much appreciated.

From a lenders situation the issue is your credit history. You are obviously living a life style well beyond your means. Reflected by the unsecured loan and credit card debt. Yes selling your house squares matters off. However you then wish to borrow £270k. The risk to the lender is that you continue to mismanage your personal affairs. In the future will rack up sizable debts again.

Your personal assurances will count for nothing, as has been statistically proven. The odds of you reoffending are extremely high. A lender will wish to see you tackle your own problems not take an easy way out. As it's this that will demonstrate that you are taking matters seriously. The days of easily obtained credit are over.

Sorry if this isn't what you wanted to hear. However this is the reality of the situation.

My personal advice is to pay a vist to the Debt Free Wannabe Forum and seek both help and support. Plenty of people on there have had their light bulb moment. Now go to extraordinary lengths to rein their debts in.

Paxman

Thanks for your response - the first vaguely helpful one so far!

Our current lender is Brittannia, don't know if that helps you to understand the situation further.

I am aware that our previous track record with Credit Cards hasn't been great but to put it in context, we have pretty much stopped spending on them over the last 24 months as we have been trying to clear them down. The bulk of the spending was pre 2010 and almost all due to being made suddenly unemployed from my previous employer just as I was setting up my new business whilst simultaneously maintaining a family with a 3 year old, a 16 month old and a 2 week old!

Is there any way a commitment to pay-off unsecured debts and to cancel credit cards can be written into any mortgage offer? I have also enquired about a loan secured on the property as a means to tie the pay-off to the sale but Brittannia were being very non-committal about whether that would change their opinion.

amnblog

Forget Brittannia and engage a mortgage broker.

kingstreet

Paxman wrote: »

Is there any way a commitment to pay-off unsecured debts and to cancel credit cards can be written into any mortgage offer?

Yes. That is how it is usually done.

As amn has suggested, there will be lenders willing to accept this and others who won't. An independent broker will find you the best deal from those likely to want to lend so you limit any further wasted time with those who don't.

Thrugelmir

Paxman wrote: »

I am aware that our previous track record with Credit Cards hasn't been great but to put it in context, we have pretty much stopped spending on them over the last 24 months as we have been trying to clear them down. The bulk of the spending was pre 2010 and almost all due to being made suddenly unemployed from my previous employer just as I was setting up my new business whilst simultaneously maintaining a family with a 3 year old, a 16 month old and a 2 week old!

Is there any way a commitment to pay-off unsecured debts and to cancel credit cards can be written into any mortgage offer? I have also enquired about a loan secured on the property as a means to tie the pay-off to the sale but Brittannia were being very non-committal about whether that would change their opinion.

No one is judging you on the reasons why. People spiral into debt for many reasons. Though the over riding factor is normally the lack of emergency savings and living from pay cheque to cheque.
Only takes one misfortune and it's downhill from there.

Debt consolidation is never advisable. To do so then increase borrowing to £270k on a 90% LTV . Suggests recklessness to a lender.

steeeb

In the eyes of a lender it is very high risk. Whether it actually is or not, we don't know you - either does the lender. You obviously think it's sensible or you wouldn't be perusing it.

Your best bet is seeing an independent all of market broker and telling them everything - they'll then be able to tell you if they can find a lender willing you lend the amount you desire.

In the meantime - keep paying your debts - it'll do some good and will also go some way to showing a mortgage company you clearly can afford to repay them and and actively seeking to do so.

Something to discuss with the broker is the possibility of releasing equity on your current property with the purpose of paying your debts - doing this first may well then allow you to find a lender that will then lend to you.