Removing Equity from Property

[biddingwar]

Hi everyone,

I'm just looking for some opinions as I can't work out if this is a stupid idea or a good idea

We are in the process of buying a new home, we have sold our property for £295k and have £100k equity. The new property we are purchasing for £340k but needs a new kitchen and bathrooms.

I asked the mortgage broker to provide me a quote with removing £40k equity, I was going to use this to cover moving costs and also renovation work. Instead I was sent a quote for putting down a 15% deposit (£51k) and removing the rest (£49k) to cover costs and moving etc - this came back with payments as £1000 a month. I asked how much it would be to remove just the £40k and it was £970 a month so only £30 less to put back in another £9k.

So my question is, I am thinking of taking out the £9k and using it to pay off a car loan we have? The payments for the car are £300 a month but the difference on the mortgage is £30 a month. This means we would move to the new property and our monthly outgoings would not change.

We do have a good amount spare every month to accommodate the extra cost but we have just had a baby and we are planning to have another quite soon so we want our mortgage costs as low as possible at the moment with the idea that once both babies are at school we will reduce the term and increase our payments.

Any insight welcome!

Thanks

Probably makes sense as the interest on your mortgage will be much lower than that on your car loan. You could try to over pay on your mortgage by the extra £300 while can as well (as long as overpayments don't attract any penalties).

It's a good idea to consolidate your debts on the lowest interest rate possible.

It only works if you can resist the temptation to run up new debts outside the mortgage.

You are comfortable with the monthly payment, for which the additional costs appears to be quite low. Just so you are clear, also work out what that small additional cost is over the lifetime of the mortgage.

In an ideal situation, you would make overpayments to your mortgage to pay back the additional capital borrower as quickly as possible. Make sure your overpayments reduce the capital borrowed rather than just the monthly repayments.

If you can do that with the mortgage you have been offered then go fof it.

@FinallyHere I definitely won't be tempted to change cars, I don't know if I can say the same for my partner

Thank you both I think I will go with the £1000 mortgage repayments and pay off the car. Maybe also look at the option of early repayments

Remember that you're extending the term of the loan if you swap the car loan into the mortgage, so it could cost a lot more in interest over time.

For it to work, you need to over pay and refrain from taking out further debt. You need to aim to save up so you can buy your next car with cash.

You may get a much better interest rate with a 20% deposit, which means you can only take £32k of the equity. Would be worth checking what your monthly payments would be.

@ForensicAccountant unfortunately this wouldn't leave us with enough to complete the work needed to the house! I'm hoping to get it revalued in a few years and have him over the 20% and then remortgage

Don't forget that it's £300/m for say 3 or 5yrs. If you consolidate that into the mortgage it's only £30/m but for 25 years or whatever - massively more expensive and you'll still be paying for the car long after it's gone.

@nutellamagnet sorry if I'm being stupid but I don't understand how it will be massively more expensive?

We are currently paying £300 a month with 4 years remaining (£14,400 - early payment will reduce this by over £4000)

£30 per month extra on the mortgage (over 38 years) is £13,680 so I would actually be paying less.

Of course however I don't intend on staying on this mortgage for 38 years, we will reduce the term once our children are at school and can make higher repayments so I think in the long run it works out we pay less?