Debt V's Equity

crapwithmoney_3

Hi all,
First of all, brilliant site. I'm pretty new to this but it appears I'm amongst like minded people! Does anybody have advice on what I should do in this situation; I've got a personal loan with a decent bank for around 18k, it's to be paid over 4 years at about 7% apr. There is no penalty for early repayment. This loan is a real burden and worst of all I've got nothing to show for it! I'm paying just short of 500 quid a month which is getting tighter and tighter. Recently I've had to take out a credit card and it's a sign I think of me not being able to keep up. I don't honestly think I can keep this loan up for 4 more years because I simply cant afford that ammount each month. On the other side of the coin I have about the same ammount of money (18k) in equity in my house. I put down a 15K deposit.

. The question is am I better to keep the equity in my house or am I better to use it to make me debt free? The thought of paying almost 500 pound out each month for the loan seems pretty daunting as it's a real strain for my wife and I. Anybody out there that's been in this position? Or anybody that would advise either way? Thanks for reading! :rolleyes:

RAS

What is the early redemption penalty on this?

CCCS_Emily

Hello crapwithmoney,

By remortgaging to clear your loan, to some degree, you are just moving the debt around and securing an unsecured debt. This will increase your mortgage payment and, if money is still tight, you run a bigger risk by not being able to pay your increased mortgage payments than not being able to pay an unsecured loan.

You need to concider the affordability of this carefully.

I'm sure others will be along soon to give you their thoughts!

bunking_off

I think what you need to be clear about here is you're not using the equity in your house per se, but using it to borrow against.

If your intention is to add the loan to your mortgage (or take out a 2nd mortgage against the property), to be repaid over the existing 4 year term, then it's not a bad idea...so long as you're sure you can make the repayments because your house is at risk if you can't.

However, if you're thinking about adding the value of the loan to your mortgage and paying it off over the existing term of your mortgage, then you need to be aware of the implications.

Let's look at some sample figures to illustrate. Over the outstanding period of your existing loan, you'll pay approx £2500 in interest charges. Let's say you add the the £18k to your mortgage, and for the sake of argument that your repayment mortgage had 20 years left to run and was at 5% interest rate. At first sight it looks great because you'll only add approx £120 to your monthly mortgage repayment so it's a great idea because you're "saving" £380 a month. But look at how much more you'd pay overall. Rather than the £2500 interest you're currently going to pay, you'll end up paying approx £10k in interest over those 20 years. Very bad move.

So if you're going to pay off quickly then it's worth looking at. However, as Emily says, it means the debt is now secured on your house. You'd probably save a few £hundred (I think approx £600) over the period of the loan...a lot of money, but peanuts against the value of your house if you do put it in jeopardy.

solventguy

I'm not an expert in this area, but would you get a better APR on a mortgage equity withdrawl? 7% for 4 years sounds a bit better that 7% for 20! Sure, it may be tough now, but calculate the amount of money your going to pay to service this debt in both situations - the decision will likely be pretty obvious now. Suck it up for 4 years!

Best of luck!