Remortgage or consolidation loan?

cpu

Can anyone offer advice on which might be the best route to go down?

I work away a lot and although I'm not rich, I do have a few bob in the bank. A family member has approached me for help (they asked for advice, but I've a feeling they were more after a handout). I have my own immediate family to consider and whilst this person might need a bit of help, I don't think they are in a desperate state, so I'm afraid me giving them money is not an option. The figures they gave me are -

They have a mortgage, (5.7%) with £11,000 owing/7 years to go. House is worth approx £70,000.

They also owe £7,000 on a personal loan (6.9%) just over 3 years to go on it and roughly £9,000 on credit cards (0% but ending shortly).

They were trying to do house improvements and add an extension, by borrowing on the credit cards but they still need more cash and they'll need to start paying interest when the 0% ends.

Should they try to remortgage to cover the lot, roughly £30,000 or would it be better to keep the mortgage separate and get a consolidation loan if they can for the rest?

Thanks if anyone can help.

freda

I wouldn't re mortgage. A quick look at https://www.whatsthecost.com shows that at an interest rate of 5% over 25 years, the true cost of borrowing £30k now would be almost £53,000 !!!!!!!!!!!!!

Similarly, consolidating the debts may be a bad idea. I say this because often people who run up debts and consolidate suddenly find that their monthly income that isn't taken up with repayments increases. They happily spend away, without saving, then when the boiler goes, or they fancy a nice holiday, they get out another credit card, because they can afford the repayments. Before you know it, they are back at square one, just this time with a consolidation loan PLUS all their new debts.

The mistake made was not addressing the initial reason that they have debts, i.e. spending above their means.

I would seriously advise getting them to do a statement of affairs, which details their income versus their expenditure (debts and non debts). Then encourage them to look at their spending and work out where they could cut back in order to be able to afford to pay off their debts steadily now, without consolidating or re-mortgaging. Read the 'Money saving Old Style' board here, or the Living Below your Means board on https://www.fool.co.uk for ideas on cutting back, often without even noticing a change in your lifestyle.

If their credit history is reasonable, there is nothing to stop them applying for other 0% deals to move their debt onto to replace the current ones.

Make sure they are not paying just the minimum on their debts - paying the minimum will take AGES to pay off the debts. Tell them about snowballying - i.e. throwing all your spare cash each month at the debt with the hightest interest rate till its paid off, then throwing all spare cash at the next highest and so on, till they are all gone. This reduces the amount you actually pay over the life of the debts considerably.

It will cost them SO, so, so much more to remortgage or consolidate, they really should try as hard as possible to pay off the debts now. Look at the 'debt free wannabe' board here, or at the 'Dealing with Debt' board on https://www.fool.co.uk. The latter offers incredibly supportive advice and is full of people who are getting themselves free of debt as fast and as cheaply as possible. I don't really read the one on here, so I can't comment, sorry!

I'd encourage them to do lots of sums and research before they commit, and seriously think about paying off the debts as soon as possible now rather than put them to one side by consolidating or remortgaging which will only cost more in the long run, as detailed above.

Sorry if I've waffled!

Welsh_John

"Short term fixed rate loan" or "Remortgage" depending on income available & future prospects. Once done "Cut up the credit cards"

cpu

Thanks for replies.

I think probably the short term fixed rate loan might be the way to go.

I maybe should have made clear in my first post that they seem to have enough of an income to manage the payments (just) but they have too many things outstanding because of the way they chose to fund the improvements and they're feeling a bit overwhelmed. Now that the 0% deals are almost at an end, it would have been better if they could tie everything together so that they were only having to make 1 or 2 payments. The credit cards revert to a much higher interest rate so as they are going to have to juggle things anyway, the question of remortgage or consolidate came up.

They are doing the house up to sell it, and are in line to make at least £35,000 profit, it's just that their short term situation isn't great. They probably should have got an improvement loan from the start instead of trying to do things on credit cards to avoid interest completely.

Thanks again.