Remortgage and debt management

Chrost

Hi everyone,

I’ve had a quick scan of the boards and couldn’t find anything that matches my question (s) but I do apologise if there is a thread already out there. Love these forums and appreciate the amount of effort people go to to offer advice so I’m hoping someone can help.

Behold, my life story...

My situation is as follows... I currently have a mortgage on a 3 bedroom property in a good area in the north east. We bought the house as first time buyers in November 2016 and it was basically our dream home. We paid 180,000, put down 5%. We have spent around £5000-7000 renovating it. Damp proofing, replastering, a lot of consmetic work, but there were some quick fixes that have significantly improved the house. We also did a lot ourselves. It’s in good shape now and we have the space to extend so we see it as our forever home. In addition to this, the area is currently going through a lot of redevelopment and in my opinion seems to be quite a desirable area (always has been but I would say more so now, than before). Houses in our street usually sell within a week.

In addition to the mortgage I also have a bank loan of £16,000 and the remaining term is 45 months. This loan was taken out for debt consolidation a few years ago. I was a wreckless with money and unnecessarily spent on 2 credit cards. I also took out a car loan because at the time was working a job with a long commute (wrong decision, upon reflection). In recent years I’ve changed my habits, somewhat. I save money if I want to purchase something, I budget and never spend if I don’t have the money. Haven’t gone near a credit card in 3 years. Indeed, I saved the money for my partners engagement ring last October and we have been putting away 550 per month to save for the wedding. We almost have enough to cover he costs and are saving for the honeymoon.

Ok...

The loan still really bothers us. Even though my debt has always been “manageable” I am keen to never repeat my mistakes. We are strict on our selves when it comes to budgeting these days and realise we could live better with the extra 382 quid that comes out every month to pay it (clearly). It would certainly help us afford our honeymoon.

I’m semi aware of a few options but his is where I’d like some advice. We could over pay to get rid of it but at the moment (and in the last) there are things we would like to prioritise (wedding, honeymoon). I understand this may not be the “sensible” option but these things are important to us and we would like to do it before starting a family within the next few years.

Now, our fixed rate is up in November. Purely speculation, but I believe our house is worth more than what we paid, not significantly but certainly £5000-10000 (we’ve spend at least £5000 and genuinely have made improvements) at least. In addition to this, we would hope to get a better mortgage rate when we remortgage.

I’m asking if there is anything we can do about the loan when we remortgage. Is it possible to add this on to the new mortgage in some way taking advantage of the fact that we have improved the property, paid off, admittedly a small amount and could potentially get a better mortgage rate? I do understand the risks/benefits. I appreciate that in the long term we will pay more in interest for the loan. From what I’ve read this is generally considered a bad idea but there are circumstances where it could work... We are comfortable weighing up the risks and benefits and I’m not necessarily asking “what would you do?”. But I am just generally really hazy about my options here (if I even have any) and how it would actually work. Indeed whether it’s even something that’s possible.

Finally, the loan is not a problem, we aren’t in a hole, we live comfortably (and save) and it will be paid off within 4 years. We recieve incremental pay rises and there are good opportunities for progression in our jobs, which are secure. So it’s likely we will become gradually more comfortable. Sucking it up, paying my dues for the decisions I made and paying it off for 45 months is obviously an option. BUT, who wouldn’t want an extra 350 quid in their pockets every month if it was possible, right?

Any advice is greatly appreciated...

Thanks for reading!

ACG

I could not read your whole post. The important bits are the facts and figures.

If you can reduce it all down to what you have, what you want and any relevant figures I will happily take a look again.

But from what I can gather you are looking to roll your loan up in to your remortgage?

Assuming that is the case and their is enough equity there are lenders who will do it. General rule of thumb however is that the number of lenders who will do "debt consolidation" above 75% LTV are quite slim. So whilst it can potentially be done and at normal rates. Your options may be limited.

If I have got it wrong, apologies. I just did a quick scan of your post.

sal_III

Why would folding the Loan into the mortgage be a bad idea if you can afford over-payments and have a secure income? Rough math (from the rough figures yo gave) shows that your APR is about 7-8% meaning the cost of your loan will be about £2600, if you fold it into a mortgage at 2% 5 year fix, for 4 years it will cost you about £800 by that time you should be able to overpay and clear it.

Ignore what you have put in the house and what you bought it for. The figures that matter are:

- How much it's worth now (you said houses in your area sell within a week - how much similar houses sold for in recent months?
- How much is the outstanding balance on your current mortgage

These 2 figures will help you calculate the LTV (Loan To Value) for the re-mortgage, it's the most important bit as like ACG said, this is what Lenders will look for when deciding whether to lend you enough to "fold in" the loan, or not.

Chrost

Haha. Great feedback. I think I thought that having more info would help people advise. Guess I got carried away.

You’re right though...

£16,000 loan costing £382 a month. Remaining term 45 months.

Mortgage for 170,000 with Halifax 3.84%. Think the balance in November should be £161,000 roughly. Costs us 695 per month.

Believe the property to be worth between 185,000 - 190,000 based on original value, similar properties in the area and improvements we’ve done.

I take your point about LTV. Now that I’ve thought about it I can see actually that we probably won’t have enough equity anyway (I think that makes sense).

I think once we are in the position to do so we will just double the payments and get the cleared as quickly as possible.

Cheers for your input!

Chrost

Thanks Sal. That!!!8217;s great. It!!!8217;s making more sense in my head now (hence why I posted). Got some things to think about.

Cheers guys

ACG

Thats miles easier!
As you say, there is not really the equity to play with.

However, if your Mortgage deal is coming to an end, you can probably get that 3.84% rate down. I have customers with bad credit who are on lower rates so that should save you a few quid each month and throw it at the loan to clear it quicker?

Chrost

My thoughts exactly!! Property could potentially be worth slightly more but it!!!8217;s neither here nor there... Thanks again for your help.

Pleased I posted now...

sal_III

This put you at 85% LTV, adding the loan will result in 93% LTV don't think you will find a Lender willing to do it, even if you do the rate will be crazy, so definitely not worth it (if at all possible).

Maybe consider a remortgage for 2 year fixed, this will give you even lower rate on your mortgage and room to "breathe" use the extra funds to overpay the Loan and reduce it's overall cost.

Chrost

Yeah that sounds great. Makes perfect sense.

Thanks a lot!

Thrugelmir

As you say in your opening post. Much comes down to personal choice. If you have other priorities such as wedding, honeymoon, family in the future. I'd stick with paying off the loan. As a compromise to yourself.

BUT, who wouldn!!!8217;t want an extra 350 quid in their pockets every month if it was possible, right?

BUT, you've simply deferred repayment over a longer period of time. As and when interest rates rise. You'll actually end up repaying more in total.

The reason debt consolidation doesn't work as it it's down to people and their actions. People are born in a spectrum between optimists to pessimists. Simply put optimists spend. More likely not to learn from their mistakes. Lenders know this and set their rules accordingly.

When one day you are finally debt free. You'll regret not having got their sooner.

enthusiasticsaver

In general debt consolidation is not a good idea. You have already tried it once and turning unsecured debt into secured is a definite no no. Firstly because as you point out it may mean lower repayments but only because you are repaying it over a much longer period so rather than it being clear in 45 months it is absorbed within a mortgage which is usually repaid over 25, 30 or even 35 years. It will be more expensive in the long run and also tricks you into thinking you are debt free when of course you are not.

If for any reason you were unable to meet your larger mortgage repayments due to redundancy or sickness you could lose your house. Defaulting on an unsecured loan may lead to a bad credit record but at least you wont lose your home.

Also, and in my opinion the biggest disadvantage of you rolling the loan into your mortgage is that the lower the LTV percentage of your mortgage against the property value is the lower your mortgage rate will be. Increasing the mortgage by including the loan will increase the LTV percentage meaning instead of getting a decent rate it may even be higher than your current rate with a LTV of 93% as sal has worked out above.