After my wife becoming a full time mum our net monthly income is £2,000 yet our total outgoings per month are £2,800.

Posted on 10 January 2008

Hello Katie,

My current mortgage has 9 years left to run. The fixed rate of 4.79% finishes in March giving me the option to review my finances. My wife and I are both 36 with two young children. Since a job change, and my wife becoming a full time mum, finances have altered to the extent that our net monthly income is £2,000 yet our total outgoings per month are £2800. Much of this shortfall has been spread across credit cards that now total £15,000 with the 0% offers ending around June this year. We are currently only making the minimum payment each month(part of the £2,800 outgoings).

I also have two car loans at around 6.9% with £11,000 balance remaining over the next 4 years totaling £276 per month (also part of the £2,800 outgoings). As our outgoings are £800 adrift from our incoming I am considering adding this £26,000 of unsecured debt to our mortgage, and by lengthening the mortgage from 9 to 15 years would make my monthly new payments for the whole lot on a 5.63% mortgage (5yr fix) around £649 per month (£440 per month more than my current costs).

I fully appreciate your help on this, the Ask Bea is a valuable part to this website.

Alan

Hi Alan,

(You gave other helpful detil which I have not published.)

Please don't drop your Mortgage Payment Protection insurance. Whilst it might give you a short term gain, you are the only earner now, and if anything were to happen to you, you have no back-up plan, you need that insurance more than ever now.

Extending the term of your mortgage is a good idea in your circumstances.  Of course, if you are consolidating debt, you will be spreading the interest of your car loans and credit cards over 20 years, which will make the total interest over the term that much more, additionally, you are adding risk to your home by securing debt against it.  However, I gather that your priority is to make the monthly payments affordable.  Given the choice between having short term unsecured debt that you can't afford, and long term secured debt that you can, the latter would appear to be the lesser of two evils.

For the sake of calculations, I have used 5.5% in my following examples.

A stepped mortgage might be of help to you, particularly as interest rates are very heavily rumoured to fall in the next year to as low as 5%, some even say 4.5%.   If you think you could afford the pay rates in years two and three, then the product might be handy for an easier ride in year one, however, these are trackers, and should rates increase again, yours will go up with them of course.

Another option is to go interest only.  I only suggest this because I presume that your wife will return to work eventually, based on your current financial situation. If this is the case, then you can put the mortgage back to repayment in a few years' time.  Going interest-only is a high-risk strategy, because people do tend to not want to go back to repayment, then end up with their mortgage not paid off; but I would argue that you have a short term problem here, and could consider looking at interest only for two or three years until you have two incomes coming in again. All £98,000 on interest-only at 5.5% comes to £449, and for the sake of saving that extra £121 per month compared to just taking the term out to 20 years, it's a lot of risk on your home.

Fixed rates aren't terribly popular at the moment as so many people expect rates to fall so are taking trackers, but if you are happier knowing that you can budget to a fixed monthly payment no matter what, then you absolutely should take one.  Five years may be a bit long, their prices are not competitive at the moment, and you don't have a few months to wait for them to get better unfortunately.

I'm sure you have considered losing a car; and decided that you need one for work, and your wife may need one for transporting the children around, but if you have any way of getting by with just one, by your wife borrowing a friend or parents' car, or yours if you can get the train perhaps one day of the week, you could really save yourselves some money. Perhaps both of you could downgrade to something much more basic.

Of course, moving to a smaller property would help, but I imagine that you would prefer to look at that as a definitely worst-case scenario plan.

When you have paid off your credit cards, please cut them up. Save only one emergency one, with a limit of no more than double your free cash each month, so you know you can pay it off in a few months if you have to.

Charcol does not charge for advice on the phone, so if you want to call 0800 358 55 60, an advisor can go through your priorities and needs for you, discuss these ideas with you, and tell you what lenders can do this for you, at what price now.  You do need to act quickly though, because March is almost not long enough to arrange a remortgage and the last thing you need is to have to pay at your lender's standard variable rate for a month.

I wish you luck with all this, please make your calls as soon as possible and start your remortgage.

Regards,

Katie

Category: Consolidation of debts, Current rates & the market, Lower mortgage payments, Remortgaging

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