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 investigate a better mortgage deal. They may be able to get a lower variable interest rate or they may want to take the opportunity to lock into the low fixed rate deals that are currently available for those who have at least 25% equity in the their home. 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 4.0% will mean payments of around £1,509 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 is possible for David and Mary 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 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
It's 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.
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.
Debt Relief Order Option
Not possible, David and Mary do not qualify