More deposit cash or lower "other debts" - which is preferred by a lender?

macaulays

Evening folks,
Myself and partner are starting to try and plan our finances to allow us at some point in the not too dim and distant future to consider trying for a mortgage.

Now I know that ideally one would have no other debts and a great big deposit however that is not going to be the case for quite some time unfortunately.

At the moment we have "cash" available that would give us the 5% that the 95% ltv products are looking for but we do each have existing credit card balances. Whilst not small, they are perfectly manageable in terms of the monthly commitment and are all on long term low/zero interest deals if that makes any difference.

What I am trying to find out is whether it would be more useful to retain any additional cash we have in the future after the basics to increase the deposit amount or use that spare to reduce credit card balances or a bit of both?

I appreciate it may make no difference, one is still in the same net position regardless but I just wondered . e.g. say we were considering a newbuy mortgage deal (or an open market 95% deal for that matter) which requires a min 5% deposit. If you have a 7% deposit and a slightly higher level of existing debt, does that make you any more/less risky than a 5% deposit with lower existing debt?

Thanks for any guidance either way!

All the best,

Sandy

Dave_Ham

Hi Sandy,

It is never good to start on the home ownership ladder with outstanding unsecured debt.

That said, the rates are significantly better with a 10% deposit against a 5% deposit. The criteria is also more flexible with 10% and more lenders are open to you.

Good luck

macaulays

Thank you for your thoughts Dave Ham. Do you happen to know which way you would go if one was not able to go to another LTV band but was talking say 5% vs 7 or 8% on a max 95% LTV? Purely made up figures = 100k purchase with a 5k deposit and 3k on cards vs. 100k purchase with a 7k deposit and 5k on cards - does that make sense?

I would very much like to be considering the 90s and below however that 5%ish that I have available to at the moment was accrued before we moved from north Scotland to London. The rental levels we pay now eat up almost my entire salary (we are looking at mortgage levels that would have a repayment at almost half our rental payment) so it is unlikely I would be able to double what I have at the moment for quite some time. It may turn out of course that that is what is needed and I will just need to park these plans for a few years but I just thought, while I have the 5%ish sitting, I would investigate whether we can realistically consider this at all in the next 12m or so.

Thanks again!

Dave_Ham

Then I would suggest paying off the unsecured debt as not only the right thing to do, but also 7 or 8% will not put you in a better place than 5%

Your issue is that the 95% Loan To Value products are really hard to get hold of.

Hopefully you have never missed a payment and certainly not got anything worse than this or no hope..

Good luck

macaulays

Thanks Dave Ham, good to get a second opinion. I did think that was likely the better option but I thought I'd check with others in case, assuming your existing balances didn't pose a huge affordability issue, that having a slightly higher deposit within the range of the product made it any less risky a proposition for the lender. If you think that this would not make any significant difference then paying down the existing balances would seem like the better option.

And to your query no we have never missed any payments etc, we have sitting balances but have always been careful with them so no management "black marks" as it were other than simply the presence of the balance itself.

As an aside, I've noticed that some lenders ask for what your actual existing balance is whereas some ask how much per month that costs you. Generally, using the online calculators, I get a higher lending figure from the lenders asking for the monthly figure rather than those wanting a single total sum. I wonder if this is because when I give a single figure the lenders calculator makes an assumption about how much that would cost me per month for affordability that may be higher than in reality or is that just different lenders policies that by chance have stacked up that way? The mysteries of scoring and lending eh!

Thanks again,

Sandy

Dave_Ham

Do not look into it in this much detail, aside from driving you nuts; if you are super close to lending multiples then you will not get what you need with just a 5% deposit.

The multiples used are much less...

macaulays

Good point - one could easily get far too involved in trying to 'second guess' the way the system works! Well, the suggested max figures that come out of the online calculators are much higher than we would ever consider borrowing anyway (assuming they are at all accurate) so I was slightly hoping that if one was borrowing significantly less than the maximum figure that they quote they may lend you that this would be a positive point on an application even if you are only talking 5% deposit. Whether it makes any tangible difference though is again something that I don't know.

Sandy : )