What's better: a large credit card or loan balance

tillathenun

Hello all,

In preparation for applying for a mortgage, I'd like to know your thoughts on the best way of dealing with my existing debt.

I have a loan with £6,000 left to go on it and I'm paying just under £200 a month.

The way I understand it, banks focus far more on the amount I can afford every month than the total debt I already have?

So, would it increase my chances of getting the mortgage if I were to transfer this loan to a credit card?

Or would it be better to pay the loan off with part of the money put aside for the deposit?

Your advice will be most appreciated.

Andy

Thrugelmir

tillathenun wrote: »

Or would it be better to pay the loan off with part of the money put aside for the deposit?

Yes, as the money you are saving is earning a lower rate of interest than that you are are paying on the loan.

Clearing the loan will enable you to save more.

tillathenun

Thrugelmir wrote: »

Yes, as the money you are saving is earning a lower rate of interest than that you are are paying on the loan.

Clearing the loan will enable you to save more.

I agree (and that's certainly a Martin Lewis dictum!) but given that I want to get a mortgage soon, I wouldn't want to jeopardise the possibility of getting a bigger mortgage by losing that £6k of deposit.

Although over a long term, being able to save more makes sense, is it not better to try and keep as much as possible for the deposit?

Yorkie1

I would have thought that if you don't pay the loan off, the repayments will affect the affordability element of what a lender will lend to you. So whilst you gain by having some deposit, you lose out the other way. You'll also be paying a higher rate of interest on the loan than your savings will get so overall you're poorer off.

If your loan allows you to repay early without significant penalty you'll look a much better prospect by repaying it now and saving for another few months to rebuild the deposit.

tillathenun

Yorkie1 wrote: »

I would have thought that if you don't pay the loan off, the repayments will affect the affordability element of what a lender will lend to you. So whilst you gain by having some deposit, you lose out the other way. You'll also be paying a higher rate of interest on the loan than your savings will get so overall you're poorer off.

If your loan allows you to repay early without significant penalty you'll look a much better prospect by repaying it now and saving for another few months to rebuild the deposit.

Do you think putting the loan balance on a credit card would help then?

Yorkie1

tillathenun wrote: »

Do you think putting the loan balance on a credit card would help then?

I shouldn't have thought so. It will still be revealed as a debt, and interest rates on CCs are far more than loans, so you'll end up being able to save even less overall as you'll be paying out more in interest.

GMS

tillathenun wrote: »

Hello all,

In preparation for applying for a mortgage, I'd like to know your thoughts on the best way of dealing with my existing debt.

I have a loan with £6,000 left to go on it and I'm paying just under £200 a month.

The way I understand it, banks focus far more on the amount I can afford every month than the total debt I already have?

So, would it increase my chances of getting the mortgage if I were to transfer this loan to a credit card?

Or would it be better to pay the loan off with part of the money put aside for the deposit?

Your advice will be most appreciated.

Andy

Swings and roundabouts if you keep the debt.

36% of total on credit card balance will be taken as a commitment (3% per month) or the monthly payments on a loan.

This will be factored into affordability so if it fits then there is no issue.

Obviously not having the debt is better but if your deposit is reduced you may end up paying a higher rate on the mortgage or not getting one at all.

Best to have a play with figures and see which way works best.

tillathenun

GMS wrote: »

Swings and roundabouts if you keep the debt.

36% of total on credit card balance will be taken as a commitment (3% per month) or the monthly payments on a loan.

This will be factored into affordability so if it fits then there is no issue.

Obviously not having the debt is better but if your deposit is reduced you may end up paying a higher rate on the mortgage or not getting one at all.

Best to have a play with figures and see which way works best.

Thanks, that's very helpful - it looks like it's a £20 difference a month between the credit card and the loan (in the credit card's favour). So, it's probably not worth it.

I'll try to find some more money from somewhere to pay off the loan.