Deposit saving advice

cityoflights

Not sure if anyone can help here. We are saving to buy late this year/early next. We can put away £900-£1,000 per month towards a deposit - BUT

...up to now we have been using that cash to pay off our debts. We have got rid of a lot, but personally I still have a few remaining - 3 to be precise.

1) £3.5k credit card
2) £450 store card
3) £900 store card

We want to start seeing that deposit saved but will NOT clearing these debts affect any mortgage application? We can of course pay off the debts first, perhaps not the credit card but the two store cards could go, but the psychological effect of feeling like we haven't saved anything may grate.

We really want out of our current situation. Any advice appreciated.

Thrugelmir

Clearing your debts first will speed up the time it takes to save for your deposit. So don't feel as if you are going now where. The effort is well worth it.

lippy1923

As above, pay off the debts first if you are being charged interest. Can you transfer your CC balance to a 0% deal?

Once they are gone, it gives you time to save up while using your credit card sensibly each month and paying off in full to help keep your credit file healthy.

MrRL

cityoflights wrote: »

We want to start seeing that deposit saved but will NOT clearing these debts affect any mortgage application? .

They will be taken into account for any affordability check that is completed

cityoflights

Thanks guys. This is really appreciated.

I might do a last minute swerve. We were due to put our first 1k away end of this month, but might just put it all into getting rid of those debts now.

I knew they would be taken into account for affordability - I guess I was just trying to put it off, but no, going to tackle head on.

Thanks again.

JSR

I would be inclined to convert the cards to a personal loan and then burn them. Over five years such a loan should cost you about £100 per month and that's how much lenders will deduct from your income when determining affordability. You also have certainty about the worst case cost but can repay faster if you want. More importantly you can start saving for you deposit immediately. In 12 months you can save nearly £11,000 + interest instead of £6,000 if you pay off the cards first. Look up the regular saver best buys as they have the best rates. I know this is not the absolute cheapest way to handle your debt but I think it gets you where you want to be in the shortest time.

marathonic

JSR wrote: »

I would be inclined to convert the cards to a personal loan and then burn them. Over five years such a loan should cost you about £100 per month and that's how much lenders will deduct from your income when determining affordability. You also have certainty about the worst case cost but can repay faster if you want. More importantly you can start saving for you deposit immediately. In 12 months you can save nearly £11,000 + interest instead of £6,000 if you pay off the cards first. Look up the regular saver best buys as they have the best rates. I know this is not the absolute cheapest way to handle your debt but I think it gets you where you want to be in the shortest time.

I think that might be over complicating things for someone who's savings rate in proportion to debt outstanding means that the debt could be cleared in 4-5 months.

You're better to not have a loan repayment, no matter how small, taken into consideration when you come to buy. It'll increase the amount you can borrow - possibly allowing you to purchase in a nicer area or go semi-detached as opposed to terraced.

JSR

I don't necessarily disagree, marathonic, but it would be almost five years before paying off the cards first would result in a bigger deposit pot than simply converting the cards into a loan. The OP is hoping to buy within 12 months or less. I think deposit size is generally more important than net income multiple.

kingstreet

Carrying the card debt will see some lenders reduce your maximum mortgage by as much as £15k. If you are long on income and short on deposit, you could consider keeping some of the debt in a trade-off to get the bigger deposit a bit quicker.

I'd like to see a commitment to have the card debt repaid by completion, then you can tick the "to be repaid by completion" box on the mortgage application, then you lose none of your borrowing power.

It doesn't have to be paid off when you apply, only when you complete.

Thrugelmir

JSR wrote: »

I don't necessarily disagree, marathonic, but it would be almost five years before paying off the cards first would result in a bigger deposit pot than simply converting the cards into a loan. The OP is hoping to buy within 12 months or less. I think deposit size is generally more important than net income multiple.

Debt is regarded as a borrowed deposit. Debt and savings don't sit in separate pots. Your net worth is the 2 combined.

Lenders are looking for borrowers who are disciplined enough to save. As this indicates that they've the committment to repay a mortgage over 300 months without any hassle. Than someone that has always relied on credit to fund their lifestyle, i.e. borrow today and repay tomorrow.

JSR

Thrugelmir wrote: »

Debt is regarded as a borrowed deposit.

If this is true of any lender it is not universally true. The only effect my loan had on my mortgage application was to reduce the total amount I could borrow based on the repayment not the amount owed. A £100 per month loan would have reduced my maximum borrowing by 100 * 12 * 3.75 = £4,500. Having £5,000 less in savings would have reduced it by about £45,000 on a 90% mortgage. If the OP is willing to wait then they should take the lowest cost route, if they just want to get on in life then they should reduce the amount the debt costs on a monthly basis and start building a deposit as soon as possible.