Pay off debts or save up for house deposit?

Jimuth

All

Possibly not the right forum for this anymore but thought I'd post here as I'm not looking for hugs ... errr just sensible advice .... :beer:

Anyway, had a look at the finances yesterday and wondered whether the long term of plan needs to change. By the way - both me and mrs's jobs are secure (touch wood) and finances are in relatively good shape.

We're slowly saving for a house deposit, about £500 to £1K being saved per month. We've also got 2 loans - one off HSBC @ 12.9% :mad: and also PCP finance on a car which is also in double-digit interest territory. Intend to keep the car so happy to pay off the PCP (especially given negative equity in cars now) but have been thinking about it since the rate of the loans is so much higher now than base rate. Also it's getting harder to get good rates on savings.

Do I channel a fair chunk of savings this year toward paying off the debts or do I carry on with saving for house deposit?

If I clear the debts then it puts back the house deposit amount back down a lot by the beginning of 2011 - instead of a hoped-for 30K+ it'll be more like 15K. Obviously as time goes on the gap narrows as the monthly outgoings servicing the loans now go into house-deposit saving (by beginning of 2012 it's more like 48K without clearing loans, 37K with cleared loans).

Now, the questions for me are:

1. when's the bottom of the market going to be? Will clearing debts mean I miss the bottom?
2. what sort of finance will be available on mortgages in 2 years time? Would having a reduced deposit mean either a rubbish rate or no mortgage?
3. what effect would inflation have on my debts?

Any advice happily accepted! Thanks!

margaretclare

One of the best pieces of advice I've ever been given was by my DH when we first got together in 1997. It is:

Always - always - always - pay off debts before starting to save.

Reason: the interest you are paying on debts is always more than the interest you gain on savings.

So, pay off debts as quickly as possible THEN start to save.

The technique known as 'snowballing' is a tried and tested way of getting out of debt, then when you've 'snowballed', whatever you were putting towards your debts can be put into savings.

Good luck!

Ian_Griffiths_Halifax

How long have you had the car? Does the agreement you have, allow you to hand the car back without any further liability, after you've made (I think) half of the payments? If so, then you may be able to hand it in (this doesn't effect your credit rating as it's part of your agreement), then buy a cheaper car for a cash lump from savings (try the auctions). This way you reduce outgoings, have a car and don't use as much of your savings.

This aside, I would pay off the debt before saving for a deposit.

epsilondraconis

I would agree with the above advice; however the only thing I would add is to perhaps keep some savings available just incase if you need it for whatever reason e.g. one of you is made redundant etc.

hoggums

DEBTS FIRST.

You will be richer over time because the interest on your debts is more than what you receive on the savings.

mitchaa

Clear the debts off and by the time you have done that the 100% mortgage range will be back in order for you to buy a house.

We have already seen 95% return, 100% will be back by this time next year.

chucky

in general terms i would always say pay off debts.

however, sometimes it is actually worth taking on the mortgage debt if it is at a lower rate and using that to pay off the existing debts. some on the board may not see this as good thing as it is similar to MEWing but it is debt consolidation at a lower rate.

it's a slightly different approach and won't suit everyone, but it's an alternative option.

WTF?_2

Jimuth wrote: »

Now, the questions for me are:

1. when's the bottom of the market going to be? Will clearing debts mean I miss the bottom?
2. what sort of finance will be available on mortgages in 2 years time? Would having a reduced deposit mean either a rubbish rate or no mortgage?
3. what effect would inflation have on my debts?

Any advice happily accepted! Thanks!

Nobody knows when the bottom will be because anyone who could time these things exactly would be a millionaire in no time. Therefore I wouldn't worry about trying to hit the market at the exact bottom of the cycle. For what it's worth, my best guess is early 2010 for bottoming out of prices. I would have said a couple of years of stagnation after that but our kamikaze government is hell bent on reigniting inflation so I think we could see an inflation-fuelled surge soon after the bottom.

I would see finance getting cheaper over the next year as the government desperately pumps freshly printed money into the system through it's system of nationalised banks whilst keeping interest rates absurdly low. After about 18 months or so, it looks like getting more expensive as they ignite a massive surge in inflation which will have to be tackled before it gets totally out of control.

Inflation is great for reducing the burden of debts. It destroys the value of money - therefore just as it erodes savings making them worth less, it also melts away capital debt making it worth less too. You still owe the same amount but that amount is less in real terms and should be easier to repay.



As for saving vs paying debt. it's always a good idea to get it out of the way but before doing so make sure you have adequate savings to cope with financial emergencies. At the end of the day you can always defer/ default on debt (as long as it is unsecured) but if you need cash and you have no savings, you have no real options. So don't pay your debt at the expense of having no savings cushion.

Generali

Pay off your debts then worry about buying a house.

HappyMJ

Jimuth wrote: »

Now, the questions for me are:

1. when's the bottom of the market going to be? Will clearing debts mean I miss the bottom?
2. what sort of finance will be available on mortgages in 2 years time? Would having a reduced deposit mean either a rubbish rate or no mortgage?
3. what effect would inflation have on my debts?

Any advice happily accepted! Thanks!

1. My estimate is September 2009 (Who knows!!!)
2. Competitive deals will always exist. No debts will mean a good rate and a good deposit will get an even better rate.
3. Wage inflation is what you are after. i.e paying 30% of your current earnings to pay off mortgage. Lets say in 10 years you earn 25% more. As a proportion of salary you will be paying less. So interestingly it has a good effect. Deflation is the killer....

chucky

!!!!!!? wrote: »

As for saving vs paying debt. it's always a good idea to get it out of the way but before doing so make sure you have adequate savings to cope with financial emergencies. At the end of the day you can always defer/ default on debt (as long as it is unsecured) but if you need cash and you have no savings, you have no real options. So don't pay your debt at the expense of having no savings cushion.

!!!!!! says something very important here - the savings cushion is essential.
paying off debt or buying a house without that savings cushion is a problem if your economic circumstances do change for the worse.