Bigger deposit or no debt?

dc1980

Hi there, need some advice!

We are looking at selling our flat and buying a house but have some debt that we want to pay off as well.

The dilemma is that if we do that it reduces the deposit we will have to put down on the next house, whereas if we don't use the profit from the sale to pay any debt off, we will have a healthier deposit but will be carrying just over £15,000 of debt in the shape of £8000 loan and £7k credit card at a cost of £350 per month.

I'm self employed for just over one year with an income of salary and dividends around £2600 per month and my wife is on £38000p.a. If we paid the debt off we'd have about £40-£50k deposit left to put down after moving fees.

Currently, if we retained all the debt we have been advised we'd get about £227,000 as a mortgage.

Freeing up that £350 a month would obviously increase our ability to pay higher repayments but knock 15k off our deposit amount.

So my question is what gets us a higher mortgage offer? Being debt free with that reduced deposit or remaining in that debt and having a larger deposit?

lucie_1985

I imagine the biggest factor is actually the length of time you've been self employed and the number of years of accounts that you can show to a lender.

ACG

You would usually get a higher mortgage amount by having less debt - however if you went from having say a 15% deposit 10% then you may find your application is being assessed against a stricter affordability calculation and so you can borrow less.

In a nutshell there is no hard and fast rule. With 1 years accounts your options are limited and are probably going to need a broker to maximise those options (certainly 2 of the lenders I can think of are only available via brokers) so I would suggest speaking to a broker and letting them do the sums.

getmore4less

You don't have no debt just a different one.

Thrugelmir

For your own sanity clear the debt. Helps put matters in far clearer perspective.

audigex

I'd clear the debt - for one thing it's probably being charged at a much higher rate than your mortgage! And for another, it's then just one mortgage bill a month, rather than a loan or similar plus the mortgage.

NorthernMonkey1

Put it all in a spreadsheet to work it out.


The higher rate on the £7000c debt may not offset even a small increase in rate if you are pushed from the 85% to 90% bracket.


The only way to be sure is to work out how much each option costs, and make an informed decision from there.

goodwithsaving

Clear existing debt and get your accounts straight. Otherwise if you move in and find x, y and x needs doing you may find it hard with money going out in all sorts of different directions.

dc1980

ACG wrote: »

You would usually get a higher mortgage amount by having less debt - however if you went from having say a 15% deposit 10% then you may find your application is being assessed against a stricter affordability calculation and so you can borrow less.

In a nutshell there is no hard and fast rule. With 1 years accounts your options are limited and are probably going to need a broker to maximise those options (certainly 2 of the lenders I can think of are only available via brokers) so I would suggest speaking to a broker and letting them do the sums.

Thank you, that is exactly what we're doing. We know we are open to only a handful of lenders with my employment status so we're awaiting the sums from our IFA.

dc1980

Thanks, our IFA doing this for us right now!