Increase loan payments or start deposit

stanley97

Hello all,
Would appreciate some advice on my current situation. I have quite a large loan with 5 years term left which fortunately I can comfortably make the payments on. I have some surplus each month (about £500). My girlfriend and I need to move house relatively soon but neither of us have much to put towards a deposit.

I know that the standard advice is to pay off debts before saving, but would there be value in starting to put away my surplus each month into a deposit fund, rather than paying more off the loan so we can build up a deposit sooner?

Or will any potential lender look at the loan and say, that's not a 'real' deposit because of debt and/or just use it to offset part of the loan in their calculations??

Any thoughts on this most welcome!:)

Thanks

olly300

The lender will take the amount of money you owe away from any calculations on what they can lend you.

And some, in this climate, probably won't touch you.

stanley97

olly300 wrote: »

The lender will take the amount of money you owe away from any calculations on what they can lend you.

And some, in this climate, probably won't touch you.

Thanks for the response. My thinking was along lines of following (using some round figures for the sake of working out the principle)

Say I earn £35,000 and want to buy a house for £100,000
I also owe £10,000 on a loan
Lender agrees to pay 4* salary and wants 10% deposit.
I have £0 deposit currently.

If I save £10k during the year, and put it toward the loan, I would meet the 4* criterion but have no deposit = no mortgage

If I put the money towards a deposit, I have an 'actual' salary of £25k (£35k minus £10k loan) which meets the 4* criterion, plus I have the £10k deposit.

Does this stack up? Or is this not how it works...?

AlecE

stanley97 wrote: »

If I put the money towards a deposit, I have an 'actual' salary of £25k (£35k minus £10k loan) which meets the 4* criterion, plus I have the £10k deposit.

Surely you have,

Salary: £35,000 pa
Savings: £10,000
Debt: in excess of £10,000(*)
Net savings: £0

Result: No deposit, no mortgage.

* I am guessing that as the loan is quite large and has a 5 year term, the £500 per month overpayment capability is not going to repay it in 12 months and will probably leave more than £10,000 left after the 12 months.

Sorry :-(

Alec

stanley97

AlecE wrote: »

Surely you have,

Salary: £35,000 pa
Savings: £10,000
Debt: in excess of £10,000(*)
Net savings: £0

Result: No deposit, no mortgage.

* I am guessing that as the loan is quite large and has a 5 year term, the £500 per month overpayment capability is not going to repay it in 12 months and will probably leave more than £10,000 left after the 12 months.

Sorry :-(

Alec

Yes, in reality the loan I have will not be paid it off in a year, but just used those figures to illustrate the principle. I don't know how much we could jointly afford at the moment, so the actual figures are tbc for now.

On your correction to my analysis though...surely I can choose not to pay off my loan with my savings and offer it to the mortgage company as a deposit. I realise of course they will take the loan into account as a debt, which will reduce what they will offer me, but I can still give them that £10k as a deposit rather than give it to my loan company, no...??