Loan secured on House

GMac14

Hi All
Genuinely posting this seeking advice for a friend.

About to get married, wife to be has spending issues and is currently circa £21k in debt. £5,500 on one credit card (credit limit £5,000, been over limit for 4 months, he has now taken out £500 loan to pay off the over limit), £7,000 on another credit card and £7k on loan from her place of work plus around £3k owed to parents. He has around £2/£3k of debt himself.

They have only been paying minimum payments on credit cards, which is around £330 per month. Her house is worth circa £160k and owes £120k on mortgage, so £40k equity.

They have now decided to get a £14k loan secured against the house as this will save them around £240 per month in reduced payments, loan is for £14k over 10 years so will pay back around £18k, they will then use this money to pay off the credit card debt but not the loans, so they will owe more or less the same amount. They are a couple of weeks away from finalizing this loan on the house and are 90% sure they will get it.

My advice has been to sell the house, rent for 6 months and pay off all of their debt, they will have around £20k left so can use as deposit on another house after 6 to 12 months renting repairing credit rating, but they wont do that.

My question is, if they secure a £14k loan against the property, how will that effect their chances of getting a mortgage/remortgage in the future? Combined earnings are around £45k, will still owe £21k in debts but have perhaps £40k equity in house/£26k after loan secured on it.

I've heard it becoming increasingly more difficult to get a mortgage, Ive been paying off my old debt and got 3 credit builder credit cards to boost my flagging credit file, so if Im thinking I might struggle, how the hell is my mate going to get one?

Sorry long winded, wanted to provide adequate detail, any and all advice appreciated.

Ta

macman

To state the obvious, a secured loan against the house means that, should they default on it, the house will be repossessed and sold at a knock-down rate.

GMac14

Yeah I understand that, but how does this effect their chances of going for a remortgage in the future? Does the amount owed/repayments cause a decrease in their salary when calculating how much they can borrow? Does a loan against the house negatively effect their credit rating/make it harder to remortgage?

Niv

I think they need to do a SOA so they understand all their incomings and outgoings. Then they need to analyse where they can make cut backs.


Then prioritise paying down the debts with the highest interest rate.


I would not be looking to secure a loan against the house, nor would I be looking to sell the house at this point.

GMac14

The issue is they are not exactly clued up on finances or getting help from sites like this. They have perhaps £350 left over each month between them after all bills are paid, of this £350, £200 is CMS which is due to stop later this year. They seem to have been given advice that their best option is a loan secured against the house and thats what they intend to do, unless I can give them solid reasons why this is such a bad idea, apart from of course losing the house if they dont pay.

silvercar

GMac14 wrote: »

Yeah I understand that, but how does this effect their chances of going for a remortgage in the future? Does the amount owed/repayments cause a decrease in their salary when calculating how much they can borrow? Does a loan against the house negatively effect their credit rating/make it harder to remortgage?

Obviously all payment obligations will be taken into account when deciding the amount of a new mortgage. So it will limit their borrowing, but so would the non-secured loans.

If they wanted a mortgage, the loan company would have to agree to a deed of postponement on the property, should be routine but occasionally we hear of lenders being difficult.

Niv

I understand. I just don't think long term a loan will help them if they do not address the reasons they are getting into debt. For example, you said they are using the 14k to pay of the cc's only, that totals 12k, what are they doing with the other 2k? 'Treating' themselves by any chance? Or are they going to chip away at the other loans they have?
If 100% of the 14k loan does not go on debts then they are simple starting the cycle over again, learning nothing from their current situation.

GMac14

Niv, I think they other 2k is earmarked for some of his debts, he took out a loan of £500 to pay off overlimit on cc and has a couple of small credit cards himself, but your point is valid and would expect them to use £12k to pay off the biggest two card debts and then use some/most of the remaining £2k for "other uses". Some people dont learn/dont want to learn/seem destined to lurch from one crisis to another.

foxy-stoat

If they do not address the cause then they will lose their house in the future.

You cannot borrow your way out of debt.

Taking out the secured loan will effect their chances of a remortgage or moving in the future. If their property drops in value then they will be stuck.

I think an IVA may be the best way forward, they may even learn something at the end of the 5 or 6 years.

csgohan4

Borrow more to pay off debt, do they have their head in the sand???

spending beyond their means is not the best way to start a marriage.

They need to seek help, Stepchange is a good charity, have a look at the debt free wannabee forum too.

If their house gets repossessed, they are unlikely able to get any mortgage let alone a loan for a long time.

GMac14

Yes they are like a pair of Emus with their heads stuck in the sand.

He is trying to sort things out but she seems too concerned with keeping up appearances and to hell with the consequences since they have lots of equity in the house and “they will be ok”. They have already been late on one mortgage payment, taken a 2 month mortgage break and are now looking to secure a 14k loan against the house.

Even in the whole 14k goes on paying off credit card debt, I get the impression the cards won’t be cut up and 12 months down the line there will be another couple of grand racked up. I genuinely think they believe that it’s just a different kind of loan and don’t understand the implications of it being secured against the house, obv I have told him will lose the house if they default, just trying to find out if there was any way they can remortgage in the future easy enough with this debt now secured against the property