Larger deposit or pay off debts?

nathand_2

My girlfriend and I are looking to purchase a property in the coming months. Our combined income is ~£50,000pa and the houses we're interested in are around £120,000.

We'll have a deposit of £20,000 but I have an outstanding loan of £5,000 (£240pm) and credit card balances totalling a little more than £5,000 (at 0% until late 2016).

Would it be better to use the full £20,000 as the deposit or pay down some of the debt first leaving a deposit of £12,000?

mrginge

Lenders will view your net position as the same. Personally i would pay the credit cards off as at that level it may raise a few questions.

nathand_2

mrginge wrote: »

Lenders will view your net position as the same. Personally i would pay the credit cards off as at that level it may raise a few questions.

Thanks for your response. I was thinking it would be more beneficial to pay off the loan rather than the credit cards first.

Paying off the loan clears a fixed payment and improves cashflow whereas credit cards are flexible. Also I'm paying interest on the loan whereas the credit cards aren't costing me anything yet.

kidmugsy

nathand wrote: »

I was thinking it would be more beneficial to pay off the loan rather than the credit cards first.

Quite right. But how do you propose to pay off the credit cards eventually? Can you demonstrate to the mortgage company that you can afford to save £5k over the next two years? (It sounds pretty comfortable to me, but I'm not a mortgage company.)

nathand_2

kidmugsy wrote: »

Quite right. But how do you propose to pay off the credit cards eventually? Can you demonstrate to the mortgage company that you can afford to save £5k over the next two years? (It sounds pretty comfortable to me, but I'm not a mortgage company.)

The monthly cost of the mortgage is approximately half of what I'm currently paying in rent. There will be other bills that will fall (council tax, electricity, etc) as well on top of the £235pm saved from paying off the loan. That leaves me with an extra £800pm to pay down any remaining credit card balances.

mrginge

nathand wrote: »

Thanks for your response. I was thinking it would be more beneficial to pay off the loan rather than the credit cards first.

Paying off the loan clears a fixed payment and improves cashflow whereas credit cards are flexible. Also I'm paying interest on the loan whereas the credit cards aren't costing me anything yet.

Yes, but as you say, the loan is a fixed commitment whereas a 5k credit card looks more like financial mismanagement (Obviously i don't know what you've spent it on).

a lender is going to be more sympathetic to a loan than a cc balance, imo anyway.

nathand_2

mrginge wrote: »

Yes, but as you say, the loan is a fixed commitment whereas a 5k credit card looks more like financial mismanagement (Obviously i don't know what you've spent it on).

a lender is going to be more sympathetic to a loan than a cc balance, imo anyway.

Good point, I hadn't really considered that (the balance does stem from some poor financial decisions on my part).

kingstreet

In most cases, a mortgage lender will take 5% of the card balance as the monthly cost, regardless of how much you actually pay and regardless of the interest rate charged on the card. So a £5k card balance will be "charged" at £250 per month.

The monthly payment for the loan is taken the same way, so a £240 per month loan will affect affordability slightly less than a £5k card debt.

getmore4less

Whats the rate on the loan?


Once you have an idea of mortgage levels you can get and rates with/without the loan and/or the CC you can make a better judgment call on where you ballance the finances.

If you can raise the morgage because of the debt then that makes the choice simple, if you can it will be what rates and if the Stooze is worth keeping.

HappyMJ

nathand wrote: »

My girlfriend and I are looking to purchase a property in the coming months. Our combined income is ~£50,000pa and the houses we're interested in are around £120,000.

We'll have a deposit of £20,000 but I have an outstanding loan of £5,000 (£240pm) and credit card balances totalling a little more than £5,000 (at 0% until late 2016).

Would it be better to use the full £20,000 as the deposit or pay down some of the debt first leaving a deposit of £12,000?

You would need to do the maths yourself....assuming you can afford all the repayments in both cases.

A 20% deposit might get you a 4% interest rate on the whole balance...for maths sake I'll assume a £100,000 home. That'll be £3,600 interest per year on £80,000.

A 10% deposit might get you a 4.5% interest rate on the whole balance assuming same value house that would be £4,050 interest per year on £90,000.

So...paying off a loan with £10,000 outstanding and charging 6% interest would save you £600 interest in a year. Is it worth it?

Why buy a house valued so low with such a high income? Personally I'd aim a bit higher and get a better property. I would aim to spend 4 times your annual salary on a property. No real reason really just the neighbours should be earning about the same as you that's all. Depends if you talk to them, go out to the same places as them and have the same values in life.

getmore4less

Just because you earn more does not mean having bigger debt is the best idea.

Eg. The place is allready big enough to start a family and affordable on amternity

The main advanatage of spending more to get a bigger place is you can skip a move should that be obvious in a shortish period<10 years, does not help if other factors like new job/area forces a move anyway.

A possible reason for staying low is to have plenty of surplus cash save a new deposit start a letting business..