credit card balance and impact on mortgage lending amount

timpal

Hi,

We're looking to buy our next house and therefore re-mortgaging.

Between us, we have around £15k of credit card debt (university).
My question is, how does credit card balances impact the maximum a bank will lend.

I have about £13k of savings (instant access-ish), which I could use to pay down the balance of the credit card debt. Does this make sense?

Will a mortgage lender effectively reduce the maximum they'll lend by the credit card balance - so in our case £15k? Or will they reduce it even further than that (perhaps because lending is based on affordability rather than total debt, because credit card debt is generally more expensive)?

Before anyone suggests it, I have run the calculations and it does make more sense to have the money in savings (3-8%) than our credit cards (0% and 5.9%).

As we're thinking about doing some work to the house we buy, the ability to borrow as much money as possible (and sensible) is important.

We're considering Brittania / FD for a mortage, so any throughts on these two specifally would be especially helpful.

Thanks

Tim

ACG

It depends on your income, ill try to explain this as best i can in writing.

Lets say the lender will lend you 4x your income and your income is £25k, that means you can borrow £100k.

Now lets say you have £5k on a credit card and your monthly repayments are £100 each.

Some (not all) lenders will multiply the £100 by 12 (months in a year) and reduce this from your income.

So they will now only lend you 4 x £23,800 = £95,200.

If you were only looking to borrow £70k, then its not going to affect you, if however you were looking to borrow £100k then it will.

All of the above is very basic and not the most accurate. It should give you an idea but each lender have their own calculations and methods so it could vary.

Basically if your income supports the mortgage and the credit cards (in the eyes of the lender) you dont have too much to worry about, if it doesnt then something will need to be done.

timpal

Thanks ACG,

So if I'm interpeting you correctly it's likely to make more sense for us to pay down credit card debt before remorgaging to borrow more, on the following quick calc (numbers have been simplified a little for simplicity):-

Option 1:- keep credit card debt (£15k) and capital (£15k)
Joint income: £50k
Less
Current mimimum yearly credit card payments: £5400 (say roughly 3%/month of £15,00)
= £44,600
X 4 (lender multiplier)
= £178,000k + £15k capital
Total = £193k mortgage offer (+ credit card debt)


Option 2:- pay off credit card debt.

Joint income: £50k
X 4 (lender multiplier)
= £200k + £0k capital
Total = £200k mortgage offer (+ no credit card debt)I know its not a lot of difference, but it would make a massive difference to to what we could do to a house that needs work.
I guess the principle is that a mortgage and credit card debt is more expensive than just mortgage debt, hence the total borrowing power is lower.
Does that make sense?

Thanks

Dave_Ham

Your logic is fair, although your numbers are a tad out and you are missing out on the cost of borrowing..

Many lenders assume 5% for credit card monthly repayment figure.

Additionally, whilst you may be able to borrow marginally more with debt repaid given the relative deposit the cost of borrowing is more.

The rates typically are determined by your loan to value %, so therefore paying down the debt may not necessarily be the best way to structure it...

Depends upon the details, but good luck

ACG

That pretty much makes sense yes.

But as dave says, it will depend on your deposit as a percetange. If you have 10% then your income would need to be a lot higher (ill try to explain this).

say the purchase price is £200k, your deposit is 10% = £180k mortgage. Now if your income was £50k and you have £10k debt they probably wouldnt touch you - even though technically it falls inside the the calculation i gave above.

If however the purchase price was £400k and you were looking to borrow the same £180k then the lender would be more likely (no guarantees though) to accept it - as there is less risk to them.

Its very difficult to give an accurate answer on here without knowing a lot more info and knowing the lender your looking at but hoepfully it gives you a bit of a headstart.

droiderm

On a side note where you getting eight percent on your savings ?

Thrugelmir

timpal wrote: »

Between us, we have around £15k of credit card debt (university).
My question is, how does credit card balances impact the maximum a bank will lend.

I have about £13k of savings (instant access-ish), which I could use to pay down the balance of the credit card debt. Does this make sense?

The logical deduction is that you've borrowed your deposit.

By demonstrating an ability to save. A lender would gain confidence that you would manage your personal finances well enough in order to meet a regular commitment (i.e. a mortgage).

So much depends on the lender you approach, and their current appetite and attitude towards risk.


What's the plan when the 0% term ends?

timpal

thanks all,
FYI - about 50% LTV, 8% on two regular savers with First Direct.

I think that has decided it - I will pay pay down our credit cards.
Aside from the mortagage issue, it makes sense to pay off the most expensive debts (as they will when 0% comes to an end), knowing its most likely to have a neutral or possitive impact on how much we can borrow makes it simple.

Cheers