Which is better - larger deposit, or better credit rating?

globalnic

Hi guys,

I've been renting for years, and have decided it's time to pay into something I own, rather than someone else's pockets.

As a first time buyer this is all very new to me, and I'm hoping for a bit of a steer with regards to what would be more attractive to a mortgage lender. I'm not going to buy anywhere for about year, and so am planning what to do with my income to get me ready for buying.

Would it be better to put my disposable income into paying off credit cards and improving my credit rating, or would it be better to put that amount towards a larger deposit? Which looks more favourable to a lender?

To give some context, I'm currently around a 5% deposit for the type of property I would like, and have a 'fair' credit rating.

I know the MSE site preaches paying off debts before saving due to the interest, but I don't want to pursue that blindly if the mortgage lender will still offer me terrible rates due to a high LTV.

Any advice or experience with this amongst the forums?

Thanks!

HappyMJ

globalnic wrote: »

Hi guys,

I've been renting for years, and have decided it's time to pay into something I own, rather than someone else's pockets.

As a first time buyer this is all very new to me, and I'm hoping for a bit of a steer with regards to what would be more attractive to a mortgage lender. I'm not going to buy anywhere for about year, and so am planning what to do with my income to get me ready for buying.

Would it be better to put my disposable income into paying off credit cards and improving my credit rating, or would it be better to put that amount towards a larger deposit? Which looks more favourable to a lender?

To give some context, I'm currently around a 5% deposit for the type of property I would like, and have a 'fair' credit rating.

I know the MSE site preaches paying off debts before saving due to the interest, but I don't want to pursue that blindly if the mortgage lender will still offer me terrible rates due to a high LTV.

Any advice or experience with this amongst the forums?

Thanks!

You need both if you don't want to pay "terrible" rates of interest. The best rates are available to those who have a 40% deposit. That's quite a lot but if you have a 10% deposit plus enough to pay the fees and charges without borrowing then some good rates become available to you.

A good credit rating is essential to just getting a mortgage let alone a good rate. Any outstanding debts you have will reduce your affordability meaning you can't borrow as much. CCJ's are usually a no. Unsatisfied defaults are usually a no except many mortgage companies will ignore mobile phone defaults. Late payments are OK if they are over a year old and you've made all the payments on time since then.

Personally if your credit is fair...then I'd make all the payments on any credit agreements on time for 1 year before considering applying for a mortgage. Maybe you are most of the way through that year now.

globalnic

Thanks for the speedy reply HappyMJ.

No missed payments on anything for years, just a large amount of credit borrowed which is being slowly paid back, plus I've had to move a lot over the last 3 years. It's on the good side of fair. No CCJs or defaults or anything like that either.

40% deposit would of course be ideal, but I'm not going to hit that in my desired timeframe - I'm fine with that. It's the choice between bringing down my credit from 80% of capacity to 20%, or increasing the deposit from 5% to about 10%. Or of course a mixture of the two!

I know with my circumstance I'll not be eligible for the best rates unless I spent a few years saving and clearing debts, but it would be good to know which will get me a comparatively better rate - focussing on deposit or credit. Or are they both equal?!

Angie_B

I think you need to be a little more specific with your figures for the kind of advice you are after.

For example, 80% of £10,000 available credit is very different to 80% of £500 credit. If your debt is currently higher than your deposit, then you have essentially borrowed your deposit, which is something lenders don't tend to look favourably on.

If you put some actual figures to your debt/deposit, people will be able to give you better advice.

Thrugelmir

How the lender perceives you as a credit risk and the amount of your debts, are separate but interconnected matters. Likewise how much you owe will be taken into consideration as to how much deposit (i.e. equity) you are personally injecting into the property.

With only a 5% deposit to put down your debts will potentially be a critical factor as far as the underwriters are concerned. As maybe viewed that your deposit isn't saved but borrowed. This is a factor in assessing you as a potential borrower.

roje

Does a larger deposit have any bearing on how likely it is that someone will be accepted for a mortgage? I don't mean any particular rate, I just mean in general. Eg. if someone is tight on affordability, does the LTV make any difference to the decision as surely someone putting down 50% or more of the property's value is a lower risk for any mortgage company?

globalnic

Thanks all.

For more specific figures, debt at ~£9000, deposit currently at ~£8000.

What I'm getting from a couple of you is the view that it would appear that I've 'borrowed my deposit' effectively, which I understand. That would be the case were I to apply now but I'm hoping that the next year will make a bit of difference. I could end up:

1. £1k debt v £8k deposit
2. £9k debt v £16k deposit
3. £5k debt v £12k deposit

Out of those three, are any comparatively better/worse for my eligibility and/or rate?

Just as a note, I know there'll be other factors involved so I'm not asking for an explicitly scientific answer, and I'm not going to come and find you in a year if it doesn't work out!! Just want views as to whether one scenario is better for me when applying.

sam2015_2

It is all depends on the affordability.
For example....say you need 200k mortgage. If you can get a 200k mortgage with 9k debt then you could just save up for the higher deposit.
If you can only get 170k mortgage with 9k debt then pay off the debt first. It'd allow you to borrow more.

globalnic

Thanks Sam.

sam2015 wrote: »

For example....say you need 200k mortgage. If you can get a 200k mortgage with 9k debt then you could just save up for the higher deposit.

Yes, of course.

sam2015 wrote: »

If you can only get 170k mortgage with 9k debt then pay off the debt first. It'd allow you to borrow more.

The question is, will paying off the debt allow me better rates/a bigger mortgage than putting the equivalent money into the deposit?

That's the point I'm wanting to clarify - hopefully it makes sense.

Angie_B

globalnic wrote: »

The question is, will paying off the debt allow me better rates/a bigger mortgage than putting the equivalent money into the deposit?

That's the point I'm wanting to clarify - hopefully it makes sense.

Unfortunately it is not that simple. Rates tend to get better the bigger the deposit you have, but only change every 5% to 10%, so the difference between a 5% deposit and an 9% deposit in terms of rates is likely to be nothing.

Debt reduces affordability as the size of the payments you have to make each month to service the debt are taken into account with regard to what you can afford to pay towards a mortgage. So bigger debt could reduce the amount you can borrow or if you are lucky, could just increase the term. The level of debt compared to salary plays a part in this also.

Try playing around with one or two of the mortgage intermediary site calculators (i.e. Nationwide and Halifax) and see what the best combination for you is, once you have inputted your salary and all outgoing etc.

globalnic

Thanks Angie B.

The Nationwide calculators are really useful, so thanks for sharing. I hadn't considered the affordability aspect of having the extra debt (i.e extra outgoings).

Appreciate your help!