How best to use my equity to pay off debt?

snoopjohnd

Hi

Not sure if this is the best place for this post, so apologies if not.

I'm in a bit of a situation and I don't really know what to do for the best.

I have about £35k in debt across a couple of unsecured loans and credit cards (0% interest currently). I also have a £200k mortgage on a house recently valued at £350k. At the moment my mortgage has just gone into variable at the end of it's fixed rate period, so I'm paying 3.7%.

Given the level of debt, I have a whole heap of monthly payments to meet that is resulting in me having to borrow more to meet the payments. We thought the best approach would be to sell the house, use the equity to pay off the debt and move into a rental in the short term while looking for a long term house (and we have an offer of £325k on the table). I guess the problem with this approach is that we lose the value of the house and we lose out with the stamp duty, given we don't actually want to move.

We've tried to remortgage with a couple of lenders, but we fail the affordability test, particularly given the size of the debt we want to pay off with a higher mortgage.

Are we left with little option but to pay for the sins of our over-spending past by throwing away our equity, or is there an approach that will allow us to keep the house, reduce my debt spending (if not total debt burden) and reduce the term of the mortgage (it's currently 35 years) - Mortgage calculators suggest a £235k mortgage over 25 years (fixed for 3) would result in a monthly payment of £940 - approx £800 less than my current monthly payment (mortgage + loans + credit cards).

National_Debtline

Hi there


You say you don't want to move. So don't.


Unsecured debts like these, even ones of a decent size, will not oblige you to sell up against your will. What you will need to contemplate, however, is renegotiating more affordable payments and quite possibly a freezing of further interest to balance the books. The downside of course is that such arrangements will be reflected on your credit file. The upside is that you are staying put and not piling up even greater debts.


That is a fairly crude and simplified assessment of where you stand - can I suggest that you put together a statement of affairs aka household budget and share it on here? That would allow other posters to make more detailed suggestions about where you go from here.


See this thread for links to budget tools you can use to put a list of figure together:


https://forums.moneysavingexpert.com/discussion/5715322


Dennis


@natdebtline

EssexHebridean

Definitely don't rush into the trap of piling currently unsecured debt onto your mortgage - that's not a wise plan unless there is no other option. First step I would suggest is to get your financial ducks in a row as it were - so as Dennis has said, get yourself a Statement of Affairs drawn up, post into here and we can take a look. There may well be savings that we can spot that will solve your problems. On the question of renegotiating your mortgage, has your existing lender offered you a new deal? It may be that this will be the best way to go currently - in the light of the near certainty that from here rates are only going to go up.

List all your spending - go back over all your card and bank statements over 12 months if you can and establish what has been spent on everything - for groceries you might find it easiest to do a 3 month average as working out a full 12 months of grocery spending can be a bit tricky! Remember the stuff that doesn't get spent every month too - insurances and things that come up less often.

From this point, you start thinking about everything you spend too - start meal planning and shopping to a list, step away from temptation in shops, question every single thing you think about buying. Consolidation rarely works at the best of times, but if you consolidate without working out and fixing the root cause of your problems, it REALLY won't work. It wouldn't surprise me hugely to find that one of those loans you've mentioned already incorporates some form of consolidation from the past?

snoopjohnd

Thanks for the info. Have put together a statement of affairs.

Any views welcome. Probably worth saying that "we" are a married couple with 3 children (8,6,2).

Not sure how to post a link to my statement - as a new user i'm not allowed to post a link.

fatbelly

Can you cut and paste the contents - removing all links?

HairyHandofDartmoor

I agree with the others, do not sell and lose your equity and your home. This would be a big upheaval for you and the family.

Your SOA will establish if you can afford your current repayments. If you can't afford them, then there are other options such as a debt management plan. None of these options will involve you losing your home.

enthusiasticsaver

I would also say don't sell up and lose your equity. Sometimes renting can be more expensive than a mortgage and you may not ever get back on the housing ladder. It also costs a lot to move so doing it twice, once to rented and then again if you buy could mean a further £10k or more wiped off your equity.

The most important thing is to address your overspending and then sort out a plan to repay. We need an soa to see what options are available to you.

EssexHebridean

Your situation definitely makes losing your home a no-no option. Try a straight copy & paste of the SOA information into here and let's take a look.

snoopjohnd

How does this look?

(all figures are monthly amounts in GBP)

Income: 3,300

Expenditure:
Mortgage: 1,012 (200k over 35 years at 3.74%)
Home Insurance: 25
Council Tax: 151
Water: 51
Gas/Electric: 90
Mobile: 40
TV Licence: 12.12
Sky TV: 74
Fuel: 40
Travel: 100
Food, Toiletries: 680
Haircuts: 15
Clothing: 30
Dry Cleaning: 15
Work Meals: 30
Pets: 20
Sport Hobbies: 100

Total: 2,485

Unsecured debt
Loan (Tesco bank) 6,480 (balance) 185 (monthly repayment)
Loan (Lloyds) 7200 189
CC (MBNA) 12330 150
CC (Virgin) 7870 200

Total 33880 724

"Disposable Income" before monthly repayments 815
After repayments 91

Based on this, it appears to be more of a money management problem than an unserviceable debt problem.

My concern is the long term nature of the debts. I want to remortgage to get a better rate (i.e. not the standard variable which will also be subject to imminent rises), but while I have a level of debt and a stack of monthly repayments, I'm unable to. I appear to be trapped in a position where I'm not going to be able to avoid being heavily impacted by mortgage rate rises, which will only worsen my situation (if, for example, a rate rise takes it over the £90 a month I currently have spare).

EssexHebridean

Well done -0 it's basic but gives us a starting point. Comments in red as usual

snoopjohnd wrote: »

How does this look?

(all figures are monthly amounts in GBP)

Income: 3,300

Expenditure:
Mortgage: 1,012 (200k over 35 years at 3.74%)
Home Insurance: 25
Council Tax: 151 If this is currently being paid over 10 months switch it to 12 to make budgeting easier.
Water: 51
Gas/Electric: 90
Mobile: 40
TV Licence: 12.12
Sky TV: 74 Too much if you're struggling - either ring them and haggle or just ditch the luxury bits down to basic packages on everything. I've currently got TV, BB &
Line Rental from Sky for £50 a month - that included box sets, so with that ditched it would be substantially cheaper.
Fuel: 40 Take it this is fuel for a car? If so you need to add in figures for tax,
insurance, servicing, MOT etc.
Travel: 100 Is this anything that can be cut at all? If you're paying for travel on top of running a car would it work better to use the car more/combine journeys etc?
Food, Toiletries: 680 You did say there were only 5 of you in the household didn;t you? This is a crazy amount if so! Look to halve this as a starting point. make sure toiletries are kept to just essentials for the time being. Children are either old enough to
buy their own or young enough to not need fancy stuff.
Haircuts: 15
Clothing: 30 Keep clothing purchases to just essentials for the time being for you the your OH - and buy the cheapest you can for the kids - eBay can be good for younger kids clothing.
Dry Cleaning: 15 can this be reduced a bit?
Work Meals: 30 can you take food from home cheaper?
Pets: 20 is this pet insurance, food, or what?
Sport Hobbies: 100 What's this for?
Add lines here for buildings & contents insurance,, entertainment, emergency fund savings etc. Go back over statements and make sure that this really reflects everything you pay out for.

Total: 2,485

Unsecured debt
Loan (Tesco bank) 6,480 (balance) 185 (monthly repayment) Get the interest rates against each of these debts so you have them all noted in one place.
Loan (Lloyds) 7200 189
CC (MBNA) 12330 150
CC (Virgin) 7870 200

Total 33880 724

"Disposable Income" before monthly repayments 815
After repayments 91 Where does this £91 go? It may be that once anything extra is added into the SOA that will take account - but either way by adding in the savings you'll be making you can definitely get this situation sorted without needing to do anything drastic!

Based on this, it appears to be more of a money management problem than an unserviceable debt problem. This is precisely why we say to people to get everything down in black and white - suddenly selling the house doesn't seem so necessary, does it!

My concern is the long term nature of the debts. I want to remortgage to get a better rate (i.e. not the standard variable which will also be subject to imminent rises), but while I have a level of debt and a stack of monthly repayments, I'm unable to. I appear to be trapped in a position where I'm not going to be able to avoid being heavily impacted by mortgage rate rises, which will only worsen my situation (if, for example, a rate rise takes it over the £90 a month I currently have spare).

You need to address getting your financial position looking better on paper immediately. This will open up more options to you on remortgaging. See what your current lender will offer you as things stand - that may be a good way forwards. Some other questions - points:

- Are you still using the cards? If yes, you need to stop - the above shows you don't need them. Cut them up now. And any that your partner might have a second card holder, too.
- Once the cards are no longer being used set the monthly DD's to the level they are currently at and then lease them there - this works as a kind of "stealth debt-busting" where you pay off slightly more from the capital each month as the payment doesn't fall.
- Put the savings on the SOA in place immediately - audit your fridge, cupboards, freezer and stores - your challenge for the next few weeks is to make your grocery spend as tiny as you can so time to be inventive with food and eat from the stuff you already have. Similarly it might be helpful to list all the toiletries you have in - sometimes people discover a stash of shampoo, or toothpaste, that they'd forgotten all about!
- Make sure you're on the best deal for everything,. Utilities, mobile phone etc. And haggle with Sky too. Everything you save off a regular monthly DD payment to a service provider, hive off into a savings account - once a month transfer the contents of that account across against a debt.
- At the end of the month anything left in the account needs to go off a debt too - choose the card with the highest interest rate to start with.
- Check your credit files for any credit card accounts that you may have still showing open and unusued - this can negatively impact the way lenders see you. Also check that all details held on your credit files are correct - you can do this for free via Noddle, MSE Credit Club and Clearscore.