Release equity during move to pay off debts

monkeysrevenge

Hi all,

I have searched the forum but cannot find a topic overly similar to this - apologies if it's been answered before, please feel free to point me in the right direction!

Me and my wife are currently looking to purchase a new home, however we have built up some very manageable debts (0% cards totalling £15k and a loan for a car with £10k outstanding paying £500 per month). Overall we still have over £1k left over every month which is gradually paying these off.

We are currently in a home that has been valued at £120k, with an outstanding mortgage of £75k, leaving around £45k of equity at that price.

We are looking at moving to a home in the £200k bracket, with the intention of taking a 90% loan for £180k, and using the £45k equity to pay the outstanding debts and the 10% deposit required, therefore only leaving the mortgage as our outstanding debt.

We have a joint income of £61,000 (rising to £72,000 when my wife goes full time next month) so affordability should be fine.

I was wondering if anyone has experience of moving home and adding other debts to their new mortgage; is it possible, is it looked at favourably / unfavourably that we shift our debts in this way?

In around 12 months time our debts should be around £3-4k on the loan only, so we would be in a much better position, however as our mortgage is due for renewal in around 8 weeks time we're looking into moving sooner rather than later (or the alternative is getting locked into a 2-3 year fix or paying a more expensive short term rate).

We do have a meeting with a broker tomorrow but I thought I'd ask the question on the forum for others' experiences and how they've gotten along.

Thanks for any input

Thrugelmir

Do you have the funds to cover all the costs of moving home?

Contemptuous

Well you're not adding the debts to the new mortgage are you? You're paying them off using the equity from the sale of your home and reducing the deposit on your onward purchase accordingly.

monkeysrevenge

Thrugelmir wrote: »

Do you have the funds to cover all the costs of moving home?

Yes, we will have a pot in a couple of months for estate agent fees, moving costs and stamp duty. Most of our income is repaying debt at the moment, but as soon as we decide to start the process we will put our extra income aside for these expenses.

monkeysrevenge

Contemptuous wrote: »

Well you're not adding the debts to the new mortgage are you? You're paying them off using the equity from the sale of your home and reducing the deposit on your onward purchase accordingly.

True, however I understand lenders would take your current situation into consideration rather than future - or is there something during the underwriting process where they can take into account that on completion, other debts would be zero despite £25k outstanding now?

monkeysrevenge

Very true - the move we made into this house took 6 months in total!

I suppose it's a case of finding a lender who will take your future situation into account.

Thanks very much

Contemptuous

monkeysrevenge wrote: »

True, however I understand lenders would take your current situation into consideration rather than future - or is there something during the underwriting process where they can take into account that on completion, other debts would be zero despite £25k outstanding now?

Exactly that. If you tell the advisor that you'll be repaying the debts from the equity in your property, that should mean they're not taken into account for affordability purposes.

Thrugelmir

Contemptuous wrote: »

Exactly that. If you tell the advisor that you'll be repaying the debts from the equity in your property, that should mean they're not taken into account for affordability purposes.

The fact that there are debts and the manner in which they built up is also a consideration. Lenders can analyse 60 months of history and identify trends. Not all about tomorrow.

monkeysrevenge

Thanks for both your replies.

The debts are very well serviced, on cards the minimum is always paid at 0% then paid / transferred in full to another 0% if available. Never missed a payment in mine or my wife's life. Not sure how we would demonstrate this, perhaps with copy statements?

I do wonder however, if/when we go for a DIP, what a lender would make of if we made an application stating zero debts but a check of our credit record showing £15k? Would they outright refuse a DIP with not providing matching information, or could be accepted and then get to passed to an underwriter?

I'm just wondering the best way to get the the stage where a human underwriter can actually look at and assess the debt repayment option rather than "computer says no" right off the bat?

Thanks again for everyone's contributions

getmore4less

Why take debts at 0% and convert them to interest bearing debts in addition securing them.

What rate is the loan
What rate is the mortgage

You don't have to take another fix there are other options.

If you have £1kpm spare and the 0% have moved at least one they were a lot higher.

What were the debts 12months ago and 12 month before that.
It will be obvious if you are reducing them or just living with them.

The transition to saving for things rather than getting loans takes time if the starting point is with debts.

AnotherJoe

Seems to me, if you can find a lender that will lend including the 0% debts,youd be better off getting a smaller mortgage (eg take the £45k equity into the new house) and then pay off the loans as fast as you can from the extra money you won't be spending on a bigger mortgage.

Eg instead of getting a mortgage for £180k at 90% LTV at say 3%, get a mortage for £155k at less than 80% LTV so maybe 2.5% rate, which means a doubly lower monthly payment which will pay off the loans quicker.

Because don't fool yourselves, you aren't really paying off the credit card loans you are just transferring them from 0% to whatever your mortgage rate will be and instead of paying them off over say 5 years you'll be paying them off over 25. Money that longer term some at least should be going into a pension.

I can also see that if you went with your original plan you'd be in danger of saying to yourselves "woohoo no credit card debt lets buy that new holiday / sofa / whatever" rather than it being crystal clear to you the aim should be to pay off debts not shuffle them around and think moving them from a pot labelled "credit card" to one labelled "mortgage" means you are financially prudent or better off.