AIBU to use home equity to clear substantial credit card debt?

[HMMnnnnn]

We have a high household income (£200k) but for reasons I wont go into on here, we’ve found ourselves with approx £70k on a credit card. The monthly payments are high. It’s not as simple as just saving up for a few months to pay it off as our outgoings are also high.

Our mortgage is up for renewal at the end of the year. We have approx £250k equity on a £600k property.

Would it be a good idea to take the equity out of the house, pay the credit card off and then up the payment on the mortgage to ‘make up’ for the equity that we’ve taken out? I believe this would be better as the mortgage has a lower interest rate than the credit card?

Please no answers asking why we have this debt or criticising this financial situation.

I would if you have the discipline to up your mortgage payments. If you are going to run up credit card debt again then no.

No, the credit card was used for something specific. Not just ran up over time.

We would take out the mortgage with the higher payment rather than simply overpay. So we’d have no choice to make the payment.

The advice is usually to move the debt to the cheapest source and I can’t imagine a 0% balance transfer is available for £70k. I check on personal loan rates just in case they are cheaper (mortgage rates are still high!) but we did essentially the same thing a few years for our renovation by borrowing more on the mortgage as it was the cheapest rate

Yes, that sounds like a solid plan, mortgages are usually the cheapest way to borrow.

On the other hand splitting it £35k each between the two of you shouldn’t be too difficult to service on 0% credit cards. It’ll just mean a bit of admin juggling the balances, and depends on your credit score.

£250k equity is fab, so this would bring you down to £180k?, still a very good position.

Is there no chance of switching most of the credit card debt to 0% deals, given that you have such a high household income?

But if you did remortgage, it would have to be very much a one off, because if you run debt up again, you could quite likely lose your home. You're also at greater risk if you lose an income.

Mortgage interest rates are lower, but they're over a much longer period of time, so could cost more in interest overall.

What you really should also do is really comprehensively and honestly review your budget, to make sure you're not overpaying on things like broadband, mobiles, subscriptions etc, that your food spending is reasonable and that you're accounting for all annual and irregular costs. Going forward, also look at overpaying the mortgage, especially the extra £70k and saving a decent emergency fund, so you can cope with the ups and downs in costs without needing to use credit.

Have a look at:

Budget Planner: how to manage your money - MoneySavingExpert

Don't do it. Never extend/overborrow on your mortgage or take out a second mortgage, thats just really bad financial management.

Just follow the process for paying down credit card debt. Theres lots of blogs and facebook pages to follow like Moneysaving expert or Rebel Finance, theres loads of them.

CC debt is unsecured but debt on the mortgage isn't - another reason not to do it.

The mortgage may have a lower interest rate but you’ll be paying it for much longer, so ultimately will pay more interest. It’s also usually not advised to turn unsecured debt into secured debt, so on that basis I wouldn’t add it to my mortgage.

You have a high income between you. Without knowing numbers, can you really not “cut your cloth” and get at least some of it cleared down?

you say you have high outgoings - I would suggest looking at those. Can you use other assets like “posh” cars swapped for more practical cars?

Adding £70k to your mortgage is a lot.

If me, I would be checking every penny going out and throwing everything possible at this debt. Time to live like students for a short while!

How much are you paying off a month at the moment?

I think I would do this but, if possible, I would also set a schedule for overpaying on the mortgage to try and get back to where you are now in terms of equity.

For example, could you overpay by 10k / 15k a year until you have 'paid off' your loan to yourself?

Most mortgages allow for a certain amount of overpayment before penalties.

At the moment our mortgage is £1,600. We would put it up to perhaps £3,500 as we wanted to shorten the term anyway.

Our HH income is slightly higher that stated with bonuses. Perhaps £250k. So we can comfortably afford this monthly payment if we no longer have the credit card payment.

I think go for it then.

It's not a great idea to add the 70k to the full 25yr term (or whatever it is) because obviously you pay back a lot that way. If you can make extra payments / shorten the term so hit the payments hard for the next few years to compensate then it sounds sensible.

Are you paying interest on the current credit card? If so would splitting it between a few interest free credit cards be affordable monthly? If it was me I would chose this option over putting it on the mortgage

Why not just pay the £2000/mth off the credit card and it will be cleared in 3 years?

If you can afford an extra £2k on your mortgage happily, then just plough that into your CC debt? Plus whatever other savings you can make?

If you can clear £2.5k per month, on a zero interest, then that will be gone in just over 2 years. More if you make cutbacks, ditch a holiday. Cut back on the takeaways, meals out etc - that sort of shit adds up, especially if you aren't used to counting pennies on a larger salary.

Be savvy about where the debt is. If you can get 25k each on zero interest for example, then plough the extra where there is interest.

Adding to mortgage might be perceived as being the easy option - but not a fabulous option.

Unless you really lack discipline I'd caution against committing to a much shorter term unless your income is bomb proof. If you lost an income, you'd get into a mess really quickly with such a high mortgage payment, especially if one of you is a high earner, rather than two £100k incomes.

You can always overpay and save or invest separately to offset the higher mortgage debt.

Yes I would do this or at least look into it. So long as it works out a better deal for you. You’ll need to work out how much extra the mortgage would be times how many years term and compare that to paying off the £70k and how long you think that would take and cost u in the long term. Generally credit card debt is going to be at a much higher rate than a mortgage debt.
It gives flexibility too, if you find yourself with extra income in the future you can over pay etc.

If there is no other option like a personal load then I would put it on mortgage

There a lots of ways of paying down debts, and mortgage is usually one of the cheapest options. A cheap consolidating personal loan might work too, if there still are such things. Another possibility is to grit your teeth for a year, pay as much as you can on the cc debt and then look to see if you can tranfer to a 0% deal on another cc card and keep going like that - transferring the debt to 0% deals until it's reduced to a more manageable level.
On the upside - your high household income gives you choices.

@HMMnnnnn i think the answer lies not with interest rates and durations but with your strategy for buying things.

When you sat down and decided to spend the £70k in the first place how did you intend to pay it off and why has that not happened.

If you bought, say , a car or kitchen, using a 0% card with the expectation that you'd use the house equity to pay it back when the 0% expired then I'd say that is a reasonable strategy. Even better would have been saving some money and receiving interest during the period.

If you just acquired the balance without thinking then I'd suggest a bank loan instead. It will be a higher rate than your mortgage but you can provide equity cover and you can wipe it out in 2-5 years rather than in 20 and it will give you the same financial discipline.

Edited to add: i presume your intent is to overpay the mortgage for the next 2-5 years to get you back to decent equity ratio.

Agree.

There's a couple of people i've followed on insta who have done this and it is obvious they are back in cc debt again with the added bonus of a bigger mortgage and interest rates.

I wouldn’t. My DPs had credit cards, bank loans, remortgaged to borrow more multiple times. It was horrific. They drowned in debt for years; we were so hard up and penniless as a consequence. It really only ended when they inherited a bit of money from late DGM and paid off the mortgage with a pension lump sum. I’d just concentrate on budgeting better and paying off more per month.