Need to borrow £31,000 to pay off debt with crazy interest

stringbeanjean

Hello, I'm really hoping for some good but simple advice as I am very new here.

Basically, in 2004 my mum released some equity on her mortgage-free house.
She borrowed £24,000. She was unaware of the consequences of the compound interest. It's something I'm personally unfamilliar with - I'm just quoting her.
Now 3 and a half years later, she owes another £7,000 on top.

We realise that in another decade or so, her house might be worth next to nothing. So we have decided the best thing to do is to pay off the £31,000 debt.

As there is only me and my mum left of the family and she wants to leave the house to me when she dies(especially because I am in my late 30's and don't own my own property), if seems obvious to me that I should help as much as I can to pay off this debt with her.

The problem is that neither of us know much (I know nothing!) about loans or mortgages. I myself have no debt at all (apart from a student loan), I rent my house and have only just become self employed last month.

My partner has also said that he will help as much as he can - so we could go 3 ways to pay off the debt - but he is quite a low earner himself so he couldn't contribute too much.

So, having read everything I could on this site - I must admit to being somewhat baffled.
Should we get a mortgage? A loan - unsecured - secured?

We would like to pay back the money as soon as possible to avoid more interest and could afford to pay up to approx £400 a month between us.
I would also like the opportunity to pay off larger sums when I can - if possible.

I've never really borrowed anything before so forgive any naivety.

I would be very grateful for any advice, we are confused and worried.

Thanks
x

Travelqueen

Hi
£31K isn't too bad, but obviously it depends on how much the house is worth.
However, for that amount of debt you would only be able to get a secured loan or a mortgage (they are both essentially the same thing in a way as they are both secured on your house but they just work slightly differently)

I would suggest that you talk to an Independent Financial Advisor who will be able to tell you the best course of action and hopefully find you the best deal. If you go to one who takes commission from the banks rather than charging upfront you won't have find any money to pay them with, or only a nominal fee, but some people feel a bit funny about this.
Also, as you are getting a mortgage you may need to lay out other costs such as surveyors fees etc.
Lastly, check the deal with regards to releasing the equity as I think some can be converted into a mortgage.

To see how quickly you could pay it off as well use the snowball calculator at www.whatsthecost.com - a great little tool

Good luck, and I'm sure you'll get loads of better advice too!

CLAPTON

how old is your mother
what is her income

what is your income

dancingfairy

I would go and see if the CAB can help? do you have the documents about releasing the equity. I think perhaps you need to some research into how releasing equity works and the interest - then maybe you can work out how to tackle it.

stringbeanjean

Thank you travelqueen!

clapton, my mother is 65 and her income is approx £700 a month

my income is really hard to work out at the moment as i've just become self employed last month. at a guess at what i might earn at the end of the year - £9,000 (if i'm lucky)

stringbeanjean

travelqueen said: "Lastly, check the deal with regards to releasing the equity as I think some can be converted into a mortgage."

not quite sure what this means - can anyone elaborate?

SalsaDanca

As you don't know much about loans and mortgages, here are a few figures to help you. You haven't said if your mother is making any repayments on the mortgage, so I assume that she is not making any payments, and the full debt (£24,000 + interest) will be paid by her estate when she dies.

If you mother borrowed £24,000 three and a half years ago, and the debt is currently £31,000, the interest rate is about 7.6%. That's a bit higher than the best mortgage rates available, but it's not extortionate. You could try to remortgage to a lower rate, but look at the mortgage application fees as well as the interest rate. When you take the fees into account, you might find it difficult to find a cheaper deal.

If the rate stays the same, in ten years' time the debt will be £65,000.

The first thing you should do is to read the contract your mother signed for the equity release mortgage. Find out if she can pay back some of the money, either as regular payments or as a lump sum, and if there are any penalty fees for remortgaging.

Good luck.

tyllwyd

I agree with the other posters who have said that you need to look at the terms of the agreement. I assume that your mum was happy that she was borrowing £24K not to be repaid until the house was sold, but she thought it wouldn't be much more than that, and she is shocked now that she's found how quickly the debt is going up? Does the original agreement allow for anyone to pay the interest, so that at least the amount outstanding won't increase?

BTW I'm not a mathematician, but the simplest way to understand compound interest is that the interest is added to the debt as you go along - so if she borrowed £100 at 10% per year, at the end of the year she'd owe £100 plus £10 interest. Then next year, she'd pay 10% on £110, so she'd owe £110 plus £11 interest. The following year it's £121 plus £12.10 interest ... you get the picture ???

Edited to say - that isn't actually any different to the way that most mortgages and loans would work, but of course with a loan your regular repayments will normally pay the interest plus a bit off the capital. It's the same for a mortgage, unless you have agreed to pay the interest only (and then usually you should have some kind of investment or savings that you plan to use to pay the capital off when the time comes).