Debt Consolidation Mortgage- Thoughts/ Advice....

SnapperUK

Firstly, thank you for taking the time to read all of this post.
Fundamentally we are not in a completely dreadful situation, but just feel a bit stuck at the moment. We live in central London and some of the figures reflect that.
Both my wife and I run own own separate limited companies whose business has been completely decimated by the pandemic. We don't employ anyone except ourselves, so fortunately have not had to make hard choices there. 
But our income has really collapsed. We pay ourselves low wages and normally take out money as dividends. This has been impossible in the last year.
We have wracked up about £40K on cards. We are not in a position to clear these and worry that making minimum payments is costing us a lot each month.
On the plus side we do have a home and a BTL property which both have lots of equity in them.
The bottom line is how should we release some equity to pay our CC debt and lower our monthly out goings?

Let me give you more details.

We have about £40K on a number of personal credit cards. We repay about £1000 a month and are charged about £400 in interest. We do have a 0% deal on some of the debt.
We calculated that £40K at our current BTL interest rate (1.48%) would be cost just £49 in interest each month, added to our BTL mortgage. In theory extending our borrowing feels like it should be very straight forward. The BTL property was last valued by the Building Society in 2019 at £935,000 and we owe £378,000 which is an LVT of 40.5%. I approached the BS about borrowing more. But when I told them that it was for 'debt consolidation' they said that they wouldn't do it. 
The BTL property works very well, we receive £2730 per month in rent and pay £466 to cover interest only mortgage. Stepping that up to £515 (£466+ £49 additional interest) a month, wouldn't dramatically alter the economics of the BTL property.
As far as our home is concerned we have an even better LTV. Before the pandemic scuppered it in March 2020, we had accept an offer to sell at £1,725,000. We owe £404,000. Which gives a LTV of about 23%. Interest only mortgage on this one is £516 a month.

The real killer for us are school fees, about £3000 a month in total. There is no doubt that we have had a high cost life-style, it wasn't until the pandemic that we realised quite how precarious it all was. We have tightened up in every area and have begun to generate extra income (£13K in 100 days), but we need to sort out this credit card situation.

I feel that we are almost caught in a catch 22 situation. The CC debt is making it harder to refinance the properties, when the refinancing would drastically reduce our outgoings and improve our credit profile. We have over £1,750,000 in equity between the properties and want to release £40K. Surely it should be straight forward...

As I mentioned our BTL lender was not interested. I also approached my bank for a debt consolidation loan and they said they wouldn't help, based on affordability criteria. I know from previous conversations with the mortgage lender for our home that they wouldn't lend to us the current amount we have borrow were it new business, so they are unlikely to want to extend us further lending. Given that our income has suffer so badly over the last 18 months we are going to be struggling to meet affordability criteria, when in fact that is the very reason we are doing this... to save £950 a month going out that we can't currently afford.

We have been hoping that sunlit uplands are just over the covid horizon and that our businesses would soon see an up tick... but nothing significant yet and time has come to act.
Please do ask any questions if I haven't made the situation clear.
I welcome any advice. Thank you for taking the time to read this. 

TheAble

It seems like releasing equity is going to be hard. As you say, banks don't generally lend more for debt consolidation as the underlying causes haven't gone away (ie you'll be back in a few months to ask for more.)

Have you got any other, more liquid assets you can sell? The other option is to maybe take an extra job to try and generate some more income. Some evening or weekend work maybe?

SnapperUK

TheAble said:

It seems like releasing equity is going to be hard. As you say, banks don't generally lend more for debt consolidation as the underlying causes haven't gone away (ie you'll be back in a few months to ask for more.)

Have you got any other, more liquid assets you can sell? The other option is to maybe take an extra job to try and generate some more income. Some evening or weekend work maybe?

Thank you for your reply. The underlying cause has been the pandemic. Hopefully that will go away... eventually. As I mentioned in my post we have managed to generate some extra income, which we can continue even when business picks up.

[Deleted User]

SnapperUK said:

Firstly, thank you for taking the time to read all of this post.
Fundamentally we are not in a completely dreadful situation, but just feel a bit stuck at the moment. We live in central London and some of the figures reflect that.
Both my wife and I run own own separate limited companies whose business has been completely decimated by the pandemic. We don't employ anyone except ourselves, so fortunately have not had to make hard choices there. 
But our income has really collapsed. We pay ourselves low wages and normally take out money as dividends. This has been impossible in the last year.
We have wracked up about £40K on cards. We are not in a position to clear these and worry that making minimum payments is costing us a lot each month.
On the plus side we do have a home and a BTL property which both have lots of equity in them.
The bottom line is how should we release some equity to pay our CC debt and lower our monthly out goings?

Let me give you more details.

We have about £40K on a number of personal credit cards. We repay about £1000 a month and are charged about £400 in interest. We do have a 0% deal on some of the debt.
We calculated that £40K at our current BTL interest rate (1.48%) would be cost just £49 in interest each month, added to our BTL mortgage. In theory extending our borrowing feels like it should be very straight forward. The BTL property was last valued by the Building Society in 2019 at £935,000 and we owe £378,000 which is an LVT of 40.5%. I approached the BS about borrowing more. But when I told them that it was for 'debt consolidation' they said that they wouldn't do it. 
The BTL property works very well, we receive £2730 per month in rent and pay £466 to cover interest only mortgage. Stepping that up to £515 (£466+ £49 additional interest) a month, wouldn't dramatically alter the economics of the BTL property.
As far as our home is concerned we have an even better LTV. Before the pandemic scuppered it in March 2020, we had accept an offer to sell at £1,725,000. We owe £404,000. Which gives a LTV of about 23%. Interest only mortgage on this one is £516 a month.

The real killer for us are school fees, about £3000 a month in total. There is no doubt that we have had a high cost life-style, it wasn't until the pandemic that we realised quite how precarious it all was. We have tightened up in every area and have begun to generate extra income (£13K in 100 days), but we need to sort out this credit card situation.

I feel that we are almost caught in a catch 22 situation. The CC debt is making it harder to refinance the properties, when the refinancing would drastically reduce our outgoings and improve our credit profile. We have over £1,750,000 in equity between the properties and want to release £40K. Surely it should be straight forward...

As I mentioned our BTL lender was not interested. I also approached my bank for a debt consolidation loan and they said they wouldn't help, based on affordability criteria. I know from previous conversations with the mortgage lender for our home that they wouldn't lend to us the current amount we have borrow were it new business, so they are unlikely to want to extend us further lending. Given that our income has suffer so badly over the last 18 months we are going to be struggling to meet affordability criteria, when in fact that is the very reason we are doing this... to save £950 a month going out that we can't currently afford.

We have been hoping that sunlit uplands are just over the covid horizon and that our businesses would soon see an up tick... but nothing significant yet and time has come to act.
Please do ask any questions if I haven't made the situation clear.
I welcome any advice. Thank you for taking the time to read this. 

This sounds more like a question for the Mortgages and Endowments board rather than the Debt Free Wannabe board. 

Is turning unsecured debt into secured debt a wise decision though? 

daisyfrau

It sounds like you have a lot of money trapped in walls, and unfortunately releasing it doesn’t sound realistic.

I would imagine consulting a good mortgage advisor would be useful if you are absolutely determined to explore the remortgage question to see if there are better options for you. 

Re your sums: the interest rate on the mortgage may be low but paying 1.45% on a debt of 40k for say, 20y on a mortgage could work out far far more expensive than leaving it unsecured at a higher rate,  if my a level maths doesn’t fail me. (Depends on the actual rates but my point is that the 2 interest rates are not directly comparable - just in case you hadn’t considered this). So the point about the wisdom of turning unsecured debt to secured is worth looking at carefully.

As it is - it’s not an option anyway so you need to look carefully at your spending and your budget. The school fees are huge and I guess you’d have to ask whether you’re convinced it’s worth it - especially if business doesn’t recover. Would it make a big difference to your finances to not have to pay the £3k a month? Are there luxury items than can be sold or downgraded eg cars. What is your day to day spending (statement of affairs like?) are there clubs/activities/memberships you could give up albeit temporarily. 

If you’re planning to sell your main home - you mentioned a scuppered sale - that may well end your money problems if you’re willing to downsize. 

Could either or both of you pivot to a salaried job, temporarily, and then you can give it up again when your businesses can thrive again?

enthusiasticsaver

It sounds like you are heavy in assets but cash poor and quite apart from the fact it never pays to turn unsecured debt into secured by releasing equity to pay off debt you will fail most lenders on affordability.  It seems to me the best way to deal with this is to sell the  BTL or downsize your family home but you also need to consider if you can really afford to continue with the £3k per month school fees given you don't have a high regular income and two interest only mortgages which at some point will need to be repaid.