Mortgage quotes, why different with existing debt?

teb_2

toying with the idea of moving, been playing around with mortgage calculators this morning. surprised to see that (as an example only) A&L quote calculator gives you a completely different amount you can borrow depending on whether your existing debt is a loan or on credit cards.

if you say your loan repayments each month are £385 (£20 k over 5 years) then they will lend you £115K but only £36K if you say you have £20K in cc debt. why is this?

also if we do decide we want to move and get a mortgage, would we be better getting a loan to cover our cc debt first?

Gorgeous_George

On the first point I guess they see expensive credit card debt as a bigger risk. £20K in a loan may cost £385 per month for 5 years (although I make it £433 at 6%). At 29% for a typical crediit card, the repayments would need to be £816 to clear the cards in 5 years.

On the second point, see the first point. If the interest rate on your cards is higher than the IR you could secure a loan for, it's likely to be better to take a loan to cover the credit card debt. BUT ONLY IF YOU DO NOT ACQUIRE NEW DEBT ON YOUR CREDIT CARDS.



GG

LisaT186

It's because loans are a set amount that will be repaid by a certain date. They are difficult to increase as well, but in times of trouble the monthly payments could possibly be reduced by extending the term. With credit cards, the minimum payment that you may be making will take years to clear the debt, you could increase the debt if your credit limit is high enough and if you were to transfer to a different card provider their minimum may be higher giving you higher monthly commitments to meet.

Most lenders have a set amount that they use for credit card committments rather than what you actually pay. Usually from 3 - 5% a month so on £20,000 they would class it as a £600 - £1000 monthly payment.

Hope this makes sense.

teb_2

thanks for explaining it, i think i get it now. back to the original question about whether to get a loan first to cover our debt.....our cc's are all 0% and get juggled regularly so we've not paid interest in a long time. if we got a loan it would mean paying interest on the debt for the first time in years but we'd do that if it would look better to a mortgage company and we could close the cc accounts? just not sure what to do for the best.

btw CG, i just took the loan figures from the A&L calculator. my brain wouldn't have worked it all out.

Mr_helpful

lenders treat loans and cards differently Short term loans may be disregarded by some lenders. B est thing is to try an indelendent non fe charging broker. Some deals such a the one account might incorporate the loan into your mortgage but whether this would be good advice or not will depend on your circumstances

Gorgeous_George

0% is good but do you pay balance transfer fees, typically 2.75%? If so, this needs to be taken into account when considering whether or not a loan would be better.

It seems even 0% on a credit card may be damaging your credit score.



GG

MarkyMarkD

If you have the equity in your present property, it would be way better to borrow the necessary money on your new mortgage to cover the existing debts as they then won't represent a deduction in the amount you can borrow.

If you then want to re-borrow at 0% on credit cards, after the mortgage has completed, and pay some of the mortgage balance back, then that will save you interest.

All A&L's base rate tracker or discount products are fully flexible so you can repay any amount (other than redeeming the mortgage) without penalty and draw it back down again if you need it to repay a 0% card reaching the end of its life.

teb_2

up till now we've been lucky and either had no transfer fee/it's been waived or it's been capped fairly low. things are changing now i know with regard to fees.

we own our current place outright, would we just make it clear during an application that we wanted to include existing debts in the total we wanted to borrow? good idea about the 0% possibly paying back some of the mortgage.

MarkyMarkD

Yes. Just explain that some of the money is for debt consolidation and some of it is to purchase the new property.