Pay off debt or convert loft?

[3monkeys3]

My dh has just found out what his annual bonus is and it is good news! He also has a pay rise which will equal £350 extra per month to play with. We are tying to decide what to do with the main bulk of the bonus.

Dh has a particularly toxic credit card, on which the balance is £14K, and which we have only been paying interest on for the last 12 months - this is not our only debt, but the rest is on low interest rates and much easier to manage/pay off.

My gran has offered us £12.5K towards buying a new house - we currently have a ok sized 2 bed in a lovely area, but we have 3dc and no equity to move. The £12.5K is not enough for us to move, but my dad has persuaded her to let us have to it convert out loft. The total cost of this will be £26K, so we need £13.5K of our own money - almost exactly the same as the toxic card! This will add significant value to our house, giving us much more equity and some hope of moving in the future. Plus we will have the benefit of the extra space in the meantime - which is likely to be several years.

We need the extra space desperately. The dc are all under 5 and share happily at the moment, but we don't know how long this will continue (2ds and 1dd) and when we'll have the money again (dh gets a bonus every year - this is a pretty good one and probably won't be the same next year). But if we do the extension, we won't have much money left to pay off debt and will have to live much the same as we have this year (we are losing our child benefit, so a good chunk of the pay rise will be absorbed by that). If we don't do the extension our overall financial position will improve significantly, but we will still be in the same position in terms of the house! We have actually quite good disposable income, so we can pull our belts in more if necessary and pay off more debt that way, although obviously this will be a much slower process.

We have no idea what to do for the best. Heart says loft - which is not without it's own financial benefits - and head says debt. I think.

It comes down to maths. Your 'toxic debt' on a credit card is probably being charged at very high interest (18% APR?) and common-sense says to get rid of that first. Work out what you'd save if you paid it off completely and how much extra money it would free up each month. Then take a really long, hard look at your income vs outgoings. Be utterly realistic. Don't count the bonuses for now... treat them as swing capacity rather than a definite. Make a plan for paying off your other debts in a reasonable space of time.

Then look at how you could most cheaply borrow the money for the loft conversion and whether you can actually afford it. If it is a home improvement that will add significant value then, even if you have low equity, your mortgage provider may be able to consider adding what you need to your main mortgage, for example.

It may be that you have to wait another year for the work to be done, get another bonus and get your finances more stable. But better to delay slightly and be secure than act hastily and get in over your head.

As the above post says the credit card is costing you dearly - if you have oddles of money to pay the high interest rate then fine - get the loft conversion.

But if you don't have oddles of money, which is what you are sort of indicating then I would

Pay of the debt and then cut up the credit card
With the extra 350 a month pay rise use this to get a loan to convert your loft and the loan is likely to be around 8% rather than the high rate on the credit card at 18%

Plus if you wait a year as the other poster says - you could save the 350 per month and you will have 4200 pounds less to borrow....

You owe £14k on a credit card.
You have other debts as well.
You have no equity in your home.
You're about to lose child benefit.
Interest rates, currently low, will rise at some point in the future.

It's a no brainer to me, I'm afraid. Your head is right. I'd use this year to clear the debt then use next year's bonus.

Yes, we're in a bit of a state aren't we? It's not all bad - reading another post on here has made me realise we actually have a lot of disposable income, currently just under £1450 a month after bills but before food. If we pay off the card, factoring in the loss of cb and the pay rise, we will have circa £1850 per month. That's good isn't it? I think our lifestyle is to blame and we will just have to tighten our belts for a couple of years and focus on debts/savings. We've had a bit of bad luck with money over the last few years, which is why it looks so ridiculous - good income but lots of debt/crap situation with house. Looking at that I can see myself that we have a good shot at sorting ourselves out this year - neither of us are naturally good/sensible with money, but we are getting better.

I also think you should pay off the debt but coming back to the loft, the price of £26k seems incredibly high. We also have a two bed house and the quote we had (including en suite) was £15k.

Pay the debt
Start saving for loft
Get more quotes for loft as 26k is a lot.

Complete no brainer in my opinion, pay off your debt. Before trying to save any money or anything along those lines, you should always pay debt off, nothing is worth more. We are 2 adults & 2 kids (10year old boy & 4 year old girl) & live in a mid terraced 3 bedroom home, 3rd bedroom being a box room big enough for our little girls bed, single corner wardrobe & that's it.
We could move & have a bigger home but then we'd have no money to live, no nice cars, no holidays, meals out, day trips etc...we could also lose our daughters bedroom to a staircase going into the loft & move our son up there, but is he going to thank us for putting us in £15k of debt for it? Probably not! Whatever you've got kids are used to, they don't miss what they never had so i would really really think before spending any money in converting a loft. They might be really happy sharing as they are now & don't want separate bedrooms? These economic times aren't going to get any easier so I would think long & hard about parting with anymore hard earned brass unless you really need to :)

£1850/month after bills with only food to pay for is a pretty huge amount of spare cash. If you paid off the credit card and then concentrated for 12 months on trimming your spending & paying down all your debts you'd probably be able to afford a bigger house after all.

There I was thinking 26k was a good price - I was quoted 40k for a loft conversion with two beds and bathroom

A friend was quoted 50k for a loft conversion. But this is in the SE.

enery one here seems to be missing the point here!
Gran has offered the money for a loft conversion! not to pay off her credit cards!! if i was gran i would not be to happy to find the monies been spent on themselves rather than extra space for thr kids.
However as long as op takes out loan to definately do the loft conversion it would be fine. but not to just take the money and pay off overindulgencies she has incurred.

Sorry Kitty but I think you are the one who has missed the point.

The loft quote is £26k (too high I think but that is another issue) and GM has offered £12k towards it, the balance is being paid by them (from OPs DHs payrise and bonus). OP is deliberating about whether to put DHs salary/bonus to the loft conversion or the toxic cc, not her GMs money.

If it were me I would put GMs money in the highest interest account I could, locked away for 12 months, whilst I saved up the difference.

a loft quote of 26K is a reaonable quote!! i renovate properties. try reading the post again ladykookoo. to take GM money for something it is not intended for is breach of contract legally, and imorral too

'Breach of contract' ffs? I'm sure if the OP talks to her gran and explains how her money would be used as part of a bigger, structured plan which includes making the family more financially secure as well as getting extra space or a new house in due course, everyone will be happy with the arrangement. £12,000 is a lot of money and, if gran is an unreasonable woman like kittycat68, she may put her foot down and say 'thou shalt build an extension now whether you want to or not'.... 'breach of contract my girl!'... but most people wouldn't be so controlling.

and most people wouldnt rip of thier gran either cogit o crap!!

How on earth is it ripping her off? Gran has offered a £12k cash gift earmarked to go towards an extension because she thinks what they need most is more space. OP thinks the family would benefit more if the money was spent on something else very important i.e. clearing debts. Provided everyone's on the same page by talking, no-one is being ripped off.

"Hi Gran. Thanks ever so much for offering us some money towards an extension. It's really kind of you as the kids do need more space. We can't afford to do the extension this year as we want to get our debts fully paid off first but are hoping to have saved up enough by XXXX. Do you want to hold onto the money or have us put it in a high interest account while we are saving?"

Pretty sure that would prevent any breaches of contract!

Op - in case you haven't guessed I think you should pay off the toxic debt. I'm guessing you lose about £220 a month with CB (not sure exactly as I only have one child so don't know the second and subsequent child rate). So after pay rise you will be £130 up. If you are paying interest at 18% on £14k toxic card then that is another £210 per month. So £340 a month spare. If you can shave £160 off your monthly bills then that is £500 per month to play with. Saving that for 2 years would give you nearly the amount you need. Or if your dh gets a bonus of roughly half next year then you could be there this time next year.

Personally I would pay off all the debts (not just the toxic one) before doing the extension but that is easy for me to say as I have more bedrooms than children so don't fully get your situation! But getting rid of the toxic debt is a necessity or it will slowly strangle you.

kittycat - the gran offered the money for the Op to move and the father persuaded the gran to lend the money for a loft conversion.

Sorry, but the CC debt is a no brainer - its gone along with the bonus. (You should always pay off the debt with the highest interest first.) Leaving you with 12k to start the conversion. You don't have to do it all in one day, do you? So, you get the structural guts of the thing up for 12k, and meanwhile you are saving a large chunk of your disposable income every (and I do mean every) month, which goes on the next bit. 2 months saving and you have the electrics. Another 2 and you have the plumbing and the bathroom. Anyway, I'm sure you get my drift. If the money is sitting in your account you'll spend in on stuff you can do without. That way, by this time next year you'll be ready. By the time anyone starts work on it, my guess is you'll have (or could have) saved enough for the next stage anyway.

Plus, if you pay off your credit card debt it will massively improve your credit rating, which should enable you to get better loan terms. (I think?)

Wow! I got some abuse while I was gone! For info - my lovely Gran will hold onto her money until such time we require it to either move or convert our loft, we will not be using it to pay off our debt. Our debt will be paid off by us.

Thank you for sticking up for me everyone else!

We have decided to pay off the debt and have set up the online banking to do so when the bonus lands. Thank you all for your help.