David and Mary are married with two children aged 16 and 10. They live in a
house valued at £200,000 with a £135,000 mortgage, which has 25 years to run.
They also owe around £35,000 on credit cards and loans. The loan and credit
card repayments (including their mortgage which is paid at their mortgage
lender's Standard Variable Rate of interest) total £1,869 per month, which is
proving impossible to meet from their family monthly income of £2,400. They
calculate that they currently have around £250 per month more going out than
coming in.
Debt Consolidation Option
David and Mary should certainly investigate a better mortgage deal. Paying at
the Standard Variable Rate is generally not a rational approach unless there is
a specific need for the flexibility and this cannot be found within more
competitive rates. At the same time, they should consider the option of
consolidating their unsecured debt into their mortgage. As an example, £170,000
payable over 12 years at a mortgage rate of 4.7% will mean payments of around
£1,572 per month, which should bring income and expenditure back into line. But
they must be aware of the fact that they are securing their unsecured debt. And
they must also see debt consolidation as a once and for all option.
Verdict – Well worth considering so long as David and Mary have sufficient
self-control to monitor and manage their future spending.
Debt Management Option
It would certainly be possible to negotiate reduced payments on the credit cards
and loans by providing evidence of income and expenditure. However, there is
the substantial downside of an impaired credit rating, and the probability that
interest charges would still continue at the relatively, and sometimes
excessively, high rates of credit card and loan interest.
Verdict - Second best to debt consolidation unless David and Mary feel that it
otherwise better helps them manage their financial situation.
Individual Voluntary Arrangement Option
Probably like using a sledgehammer to crack a nut. The costs of the IVA and the
detrimental impact on David and Mary's credit rating is adding to the problem
rather than solving it. There is also the problem of the equity in the home and
the possibility that the credit card and loan companies would want to claim
against this.
Verdict - It is almost certainly better for David and Mary to attempt to pay
their debts in full.
Bankruptcy Option
This would mean the loss of the home. David and Mary would be better off
voluntarily selling the property and trading down or renting.
Verdict – Forget it.
