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When does borrowing more make sense?

Discussion in 'Home and Garden' started by Pulsedriver, Jun 1, 2020.

  1. Pulsedriver

    Mobster

    Joined: Dec 19, 2003

    Posts: 2,998

    Location: UK

    Hey folks, was looking at finances earlier, I currently have;

    1) Car loan (approx 11k left)
    2) Credit card (lowish balance, around £1100)
    3) Mortgage (approx 145k) for the next 28 years term.

    Anyhow, at what point does it become sensible to borrow out, lets say, 15k against the above, pay the car loan, credit card, and block pave the front (that's been needing to be done for a while).

    Many benefits there, including the house exterior pretty much done (already done the back etc) the front driveway is awful, but there are downsides, another 15k lumped on the mortgage... Albeit monthly wise it only adds around £55 vs the £225 for the loan per month I currently pay.

    Anyone done the same? We have been at this house nearly 5 years now, the possibility of moving is always there most likely a part ex with a new home, as unlikely my work circumstances at the moment would give us the scope to sell privately and 'upgrade' to a bigger house privately. That said, we could likely be here a couple of years or so more at least.
     
  2. BUDFORCE

    Wise Guy

    Joined: May 3, 2012

    Posts: 2,125

    It's completely up to you.

    If also be wary taking financial advice from here (no offense OC community), you'll be better off in the short term, I'm guessing your car has repayments also? If your mortgage goes by by £55 a month but you don't have to pay a car loan (say £300 a month) then your better off in the short term.

    But don't forget mortgages generally have fees involved, so there may be added expense there, and it isn't free money, also taking out a mortgage over such a long term is expensive in the long run.

    If your good at maths you can work it all out for yourself. Unless your prepared to write down all your income/expenses loan agreements etc, then someone willing to go through all that and work it out for you.
     
  3. Pulsedriver

    Mobster

    Joined: Dec 19, 2003

    Posts: 2,998

    Location: UK

    Oh no of course I agree re financial advice on here, yeah the car repayments are £225 a month, credit card can pay between 50-100 or so per month, so arguably better by a fair amount each month BUT of course, longer term...Unless my house rapidly went up in value
     
  4. Armageus

    Don

    Joined: May 19, 2012

    Posts: 11,149

    Location: Spalding, Lincolnshire

    I wouldn't want to effectively be paying for a car, £1100 credit card bill or even block paving for the next 28 years...

    Get the credit card paid off as soon as possible as will likely be the thing with the highest interest rate
     
  5. Buffman

    Sgarrista

    Joined: May 4, 2007

    Posts: 7,643

    Location: Warwickshire

    Whats the % on the car loan (any early payment charges?)
    Whats the % on the mortgage?

    If you're remortgaging you could just select a shorter term to get to the same point, or overpay on mortgage (if allowed) . It may save you a lot on interest.

    Depends on if additional loan moves you up to the next LTV bracket.
     
  6. Pulsedriver

    Mobster

    Joined: Dec 19, 2003

    Posts: 2,998

    Location: UK

    Credit card is 0% at the moment, I tend to only use them when they are that rate and try to clear before that promotion time ends, the mortgage is 1.99% and fixed til late 2023.

    I think from memory the car is about 3.9% (or slightly higher) with Tesco bank, the repayment charge is 2 months interest.
     
  7. BUDFORCE

    Wise Guy

    Joined: May 3, 2012

    Posts: 2,125

    You probably won't be able to remortgage then without paying ERCs.

    Your current lender may be able to offer you a further advance though, you'd have a mortgage in two parts going forward.
     
  8. Slade2

    Wise Guy

    Joined: Apr 14, 2011

    Posts: 1,046

    Location: Stafford

    I can tell you what we did and you can decide if its a good idea.

    We had a similar situation with some debt from a car loan and some small credit card debt. We borrowed £17k against the house over 10 years and pay around £160 a month or so to pay that off so its setup as separate account on the mortgage. Around 5 years in we had to get a new car as my wife was involved in an accident that unfortunately rote off our car after we spent around 3.5k buying it and it had extensive work done in the garage at around 2k the week before it was written off, the insurance paid out 2,8k :( - so we ended up borrowing more to get a new car and we are back in the same position as we were before with some money owed on Credit cards and a loan for a car but we will have 5 years to pay back the original amount we borrowed. Dont get me wrong we settled some of the debt we had at the time and the money was used wisely but it was 5 years ago and if you have a wife like mine she can spend money likes it water :) Every time I am faced with a financial decision i now ask myself would I me happy that I made this decision in 5 years time if the situation is the same?
     
  9. moon man

    Mobster

    Joined: Nov 17, 2003

    Posts: 3,033

    Location: St Breward Cornwall

    I did the" new mortgage with much better deal with additional borrowing bit" decades back but we quickly decided chasing possessions throughout life was a total mugs game
    so as the mortgage at the time up near leeds could be overpaid without fees we threw everything into it and paid it off in 9 years .
    sold and moved to Cornwall with a big bundle of cash to buy a house here ,Boom
     
  10. fobose

    Mobster

    Joined: Dec 6, 2005

    Posts: 4,806

    Location: Cambridge, UK.

    This sounds very similar situation to someone I know (my manager). He keeps doing this as he is forever changing his car or wants another toy (metal detector, drone, kayak etc). As long as I have known him (19 years - yes I should not work for 1 company that long I know) he keeps on borrowing more and more. He started out with a 120k (2009) property, then 220k (2015) and now a 500k (2018) and has a 320k mortgage. He always pay the minimal amount back each month - I think he has a 35 year term now !!

    He has just arranged an additional 30k on his mortgage to pay off his car loan and have some work done on his house - he had a fixed mortgage on his previous properties so when he up sized had to take out a second package with the same lender. I think he is now able to combine them both + borrow the extra 30k).

    So this is just my opinion but I would not borrow more in your situation at the moment at least.

    I've always been a firm believer that if you want something you should save up for it but appreciate that is not always possible, especially if you have kids etc. I've never bought a car on finance and have always put money aside for such a time. I've only ever had 3 cars (since 2003), the first one was the only brand new one I bought which I saved up for and paid in cash (£8500 for a VW polo - kept it for 9 years before giving to my GF at the time as she stacked her car).
     
  11. daz

    Capodecina

    Joined: Oct 18, 2002

    Posts: 23,954

    Location: Bucks

    The thing that stands out to me is you have £275 a month on your car, but your mortgage probably isn't much more than that is it? I'd get that paid of as soon as you can and keep the car for as long as it keeps going.

    Borrowing more on your mortgage makes sense to pay down high interest rate cards or other loans, or, to add value (increasing equity) in your home. It can be very easy to get caught in a trap of paying of cards and loans with increased borrowing, only then to load up your cards again, kicking the debt can down the road.
     
  12. Abyss

    Mobster

    Joined: Oct 18, 2002

    Posts: 4,368

    Location: Nottingham


    By moving your debt across and reducing your payments to the £55 a month you are basically taking out a 28 year loan to pay of your car and credit card. Would you ever consider taking out a 28 year loan on a car, credit card or driveway installation? It doesn't usually make good financial sense. It also looks unlikely you'll be able to given you are locked into a deal until 2023. It usually only makes sense to transfer debt to a mortage if you are then going to also make overpayments; ie paying the £225 you are paying now into your mortgage instead. That way the interest you are saving is now paying off your mortgage quicker and over the same time period you're debt will reduce quicker.

    Whilst it's difficult to know your circumstances at face value having a £1,100 credit card balance that you also class as "lowish" makes very poor financial sense. You are paying probably a huge interest rate of 15%+ because you aren't managing your cash flow effectively. If you deem £1,100 as "lowish" are are already considering paying out more money in 2 years time for a bigger house, focus on paying this loan off as quickly as possible and build yourself up a float of £1k+ to avoid you borrowing at high interest rates again. If it's going to take 6 months+ to pay off then I'd probably look to move it across to a lower interest loan (e.g. adding it onto your car loan then overpaying) but that might just make you stop focusing on paying it off. In perspective it's probably costing you £150 - £200 a year in interest for zero benefit that could be avoided.

    Next I'd look at your car. A lot of this depends on how you treat a car. If you're likely to always have a car loan due to regularly replacing it I'd just focus on making sure you always have the best deal on what you're borrowing. With a good credit rating you can get car loans at sub 3%. Make sure you aren't on any PCP / dealer finance at a high interest rate, many of these deals are 10%+ APR.


    I suppose something to put into context is the block paving example:
    • If you remortgage for the block paving and it costs 4k, by the time you've paid it off in 28 years it'll have cost you circa 5.3k. You'll also likely not be in the house any more and even if you are will have probably replaced the drive again by then. It's a slipperly slope if you keep adding onto a mortgage things that you won't even own by the time you've paid them off
    • If you take out a personal loan at circa 3% over 5 years it'll cost you circa £4.3k, however you get the benefit of using the driveway now. Is £300 extra worth it to have the driveway now as opposed to later. Also worth considering that if you move in 2 years you'll potentially be paying something for 5 years that you only use for 2, but if it makes the property more marketable might be worthwhile and you can pay the loan off when you move.
     
    Last edited: Jun 2, 2020
  13. Psycho Sonny

    Caporegime

    Joined: Jun 21, 2006

    Posts: 33,391

    28 year mortgage term outstanding is quite high. I wouldn't be dreaming of borrowing more or even upgrading to a better home if you have that kind of term ahead. All you will be doing is paying more interest and on mortgages and your type of term. A £145k mortgage can attract £100k in interest.

    £11k loan outstanding on a car doesn't sound right with your size of mortgage and term tbh. Unless you have literally just bought the car.

    It looks like you have overspent on the car tbh but everyone is free to do what they like with their own money.

    Again credit card debt should be paid off ASAP. It's why the only credit card I have is for holiday use only because its safer than cash and I pay it off daily or as soon as I'm back home.

    Once paid off cancel the credit card and any other credit facilities you have.

    I'd then focus on overpaying the car loan. Once that is paid off focus on overpaying the mortgage.

    Also when Your deal ends shorten the term or keep it the same and ensure that you make regular large over payments.

    Unless of course you have greater than 60% equity in the home.
     
  14. MikeTheNative

    Sgarrista

    Joined: Jun 17, 2012

    Posts: 8,333

    Location: South Wales

    I agree with agree with Sonny, I wouldn't want to be adding to that mortgage. What are the interest rates on the car loan and credit card?
     
  15. Buffman

    Sgarrista

    Joined: May 4, 2007

    Posts: 7,643

    Location: Warwickshire

    A 0% credit card should not be prioritised to be paid down. (whens it finish?)

    I doubt you will be able to add additional lending to a fixed term mortgage ending in 2023.

    Have you considered overpaying the car loan (any early repayment charges?) and also making sure the credit card is paid off by the time 0% ends?
     
  16. Psycho Sonny

    Caporegime

    Joined: Jun 21, 2006

    Posts: 33,391

    that info wasn't in the OP.

    yeah focus on car, then credit card before deal ends and then home.

    he shouldn't be looking to borrow more anyway. as he is on a 28 year term as it is.
     
  17. Pulsedriver

    Mobster

    Joined: Dec 19, 2003

    Posts: 2,998

    Location: UK

    Hey folks, plenty of VERY good views here, i'll start by saying the decision is made, I won't be adding to the mortgage, nor trying, having read the posts by you all, it's given me some good insight / seeing the calculations in front of you (on screen) makes a lot of sense, and I appreciate having the different views, because that is important rather than just thinking "Oh I know it all and steam ahead etc!"

    The mortgage is approx 145k and the house value is approx 280k, maybe slightly higher although in this particular climate who knows!

    Yeah the card is 0%, it doesn't cost any interest, and when it does, it's been paid off by that point (I tend to take 12-18 month 0% purchase cards, I never balance transfer them either). And only ever keep 1 credit card of course.

    The car probably stands out the most, when we moved here, it was our first home, and I had a car, which I had the idea of selling, to pay for new conservatory windows / patio door in the conservatory as they were knackered out, but was a £4000 job, so I sold the car, bought a cheaper car, then realised I wasn't happy with it, it was a lot older than previous etc and ended up selling it, getting a loan and a similar car to what I originally had when moving in, then a couple of years later, changed up again, each time, the loan kept increasing by a couple of grand, until the latest one, yes it was an expensive car in fairness (£15k)

    The outstanding amount is £11,241 at a rate of 2.86% which I think was a good deal for a loan, and runs until August 2024.

    Arguably I didn't need to spend such an amount on a car, I've always liked changing cars, and have thought at times about downgrading, but there isn't much sense I don't think based on the fact, I would probably get £13/13.5k for it pay the loan off and be left with barely £2000, not enough for another car :D I don't do a huge amount of miles, but when I do the longer drives I prefer having a car which I know is reliable (as can be) and safe for myself and other half, and the 2 young kids.
     
  18. Buffman

    Sgarrista

    Joined: May 4, 2007

    Posts: 7,643

    Location: Warwickshire

    Well if you read post 6 (not far :D) then you would have seen it.

    To be honest im not sure why i (or anyone) respond to psycho sonny "one shoe fits all" posts >_<


    As for wether borrowing more is worth it, if its a lower interest then clearly it is (as long as overall spending doesnt go up). Similarly, if its spending to keep house in good nick and increases house value and overall enjoyment of the house then only the OP can weigh up wether that is worthwhile.

    I think the most pertinent point OP has recognised is that if hes the middle of a fixed term mortgage he is unlikely to get favourable rates and/or may suffer fees for adding more to mortgage.

    OP personally i wouldnt bother selling the car (generally speaking i think you will lose more money buying /selling frequently than keeping one decent motor. 15k motor doesnt seem massively expensive motor but i guess it depends on income/requirements /circumstances.
     
  19. TheOracle

    Capodecina

    Joined: Sep 30, 2005

    Posts: 12,287

    ^ Same

    I'd say 15 years ago when we remortgage to a better rate, we took an additional 10k out to settle debts. The thing is, those debts soon add up again if your silly (like I was). I'm not saying don't do it, we all need to go through life and learn these lessons. Life's for living, so take the rough with the smooth.

    These days, and really kinda happened when I reached 40ish, you start to hate debt. When I was younger I had no issue with it, now though I just don't like debt hanging round your neck.

    I paid off my loan and credit card, changed my car for a newer one through work on a works lease (tax reasons, but would have done it anyway) so now the only actual debt I have is my mortgage. We need a new kitchen, but we're going to wait 18 months so we can save up for it.
     
  20. BUDFORCE

    Wise Guy

    Joined: May 3, 2012

    Posts: 2,125

    Ill give you a good exmaple of the mess people can land themselves into doing this.

    About a year and a half ago I was actually auditing a mortgage application we had accepted.

    Welsh couple with kids I am pretty sure, looking to remortgage up to 90%, to consolidate debts. We were provided three months bank statements as well and the regular proof on income blag blah blah.

    What the underwritier hadnt noticed is you could see from their credit report, a settled mortgage a couple of years prior for a chunk lower then they were borrowing, and then same again a couple of years prior to that. Looking through the bank statements, you could see each month they were gettting further and further into their overdraft.

    Looking at the expenditure each month, even vs what they would save in the short run, it was obvious based on those three months, that their income still wouldnt cover the mortgage payments, and their day to day spending, despite the fact their committed debts (credit agreement) overall would reduce. Given the informaiton on the credit report, it was clear this couple had a history of debt consolidation over the years.

    This time however, they were bang to up 90% LTV, so nowhere to go, no next time....

    As this was a residential mortgage we couldnt pull the offer, a lender isnt legally allowed on a regulated mortgage unless you received additional informaiton post offer (EG you get a third party informing you they are frudulent or similar) so the mortgage probably completed.

    I have no doubt they will have just continued on the same trend and got themselves into serious financial difficulty.