Repay loan or downpayment on mortgage

sagara

Hello there. I have looked for the answer to my query but not found it, so apologies if it exists!!

I have a loan of £7k at about 9% and £2.5k at 8% plus about £3k on interest free Mint credit cards; and have just inherited about £7k in cash.

I want to buy a house (first time buyer - about £90 - 100k) so as to not pay rent which in itself seems to be a heavy cost/loss.

I am thinking to pay the £2.5k loan off and use the remaining £4.5 as equity to get a cheaper £7k loan. I will still then have that £4.5 k to put down on the mortgage.

I have no idea if this is good financial planning. Maybe I should keep the whole £7k? Any advice would be warmly appreciated.

Many thanks,

S

Rafter

Sagara,

A mortgage lender will take your loans into account when working out how much you can borrow.

You will need to find some deposit for your new house, or take out a 100% mortgage which might be expensive.

How quickly do you want to buy the house? Have you investigated mortgages?

My recommendation would be to pay off the most expensive debt first. ie your 9% loan, unless there are big early redemption fees. Then use the money you save each month to pay off your other debts and start building up a deposit.

Good luck.

R.

sagara

Thanks Rafter - I guess that makes sense - much as I hate to give the cash away!! I was hoping to buy a house in a couple of months but may rent for another 6 now.

paint

Hi sagara,

I think that in the current market financially there should be no rush to buy, as it is generally accepted that prices will remain stable for the time being. That's not to say that you shouldn't buy - I rented for ten years and had some great times with flatmates etc., but have found it it really is satisfying on a psychological and emotional level to live in my own home.

As regards your financial status, I don't know what your income is and therefore what you could realistically be allowed to borrow (and afford to pay back) and this needs to be factored into the equation.

If you had a 5% deposit on £100,000 home, your income would realistically have to be at about the £27- £28,000 mark in order to get the £95,000 mortgage (generally max mortgage = 3.5 x annual salary). This is without debts being factored in. Lenders would take into account your monthly outgoings and current debts, so would probably offer you a reduced amount. Added to that, I would allow about £3000 for fees (solicitors, mortgage, stamp duty etc.).

After fees, your £7,000 inheritence becomes about £4,000. Enough for a 5% deposit on a £80,000 property; but with none of your current £12.5k debt paid off. A £76,000 mortgage would cost you about £500 per month (based on interest rate of just under 5%). Whether or not you buy depends absolutely on how much you earn and can afford to pay each month.

Does anybody know what calculation lenders use when factoring in existing debt to determine how much they will lend?

sagara

Thanks paint, that is useful to know too. It's so nice people spend their time to help you out...

I think with my wife we could borrow about £90k even with the loan, as we earn just a bit over £35k together, probably a little more.

Yesterday I thought I should definitely pay the loan back. It's just that six months more rent is an expense in itself. So if we paid 6 x £300 = £1800 rent that seems to be like throwing away money to a landlord rather than a bank, so despite the advice which seems to say pay the debts first, I still have a niggling feeling I should get on the property market.... so I am investing rather than throwing it away. Even if it means buying a cheaper property and selling it on after a year or two.

Am I making sense or becoming even more deluded. Please advise!!

rchddap1

I'd do my maths and work out what I could afford. That is, estimate a mortgage, council tax, electricity, payments on loans etc... to see whether it is financially possible. You also have to bear in mind what you are after house wise. Are you looking to make an investment, and then 'cash in' after a couple of years before moving somewhere else? Or are you looking for a 'home' that you could be happy in for the next 5 - 10 years? At the moment no-one really expects the market to continue to 'bloom' as it has done over the past few years, so don't count on your property being worth 20% more in a year or two's time..as chances are it won't. However, knowing the property market it'll prove me wrong.

I understand your views on the rent...I was in the same situation. Except I was watching my landlady go on holidays to Kenya...I'll give you one guess how she was able to afford that. I ended up buying 40% through a shared ownership scheme and my £7k savings has now turned into £17.5k in our house. However, we did buy the house a couple of years ago, and I don't care if we lose all of that profit. Its my home so I don't care.

sagara

Rchddap1 - thank you too. The help here has really opened things up. I do need to sit down and do some sums. Emotionall I definitely favour buying if possible, but it's the 'if possible' that's the problem. Watch this space!! Sagara