Should I pay off a £5K loan with the proceeds of my house sale?

Distant_Cousin

Hi folks

I have just put my house on the market at the moment, and have decided to step off the housing market for a short time (as I'm relocating and want to be chain-free)

I have 2 years left and an outstanding balance of £5K on a personal loan. I am wondering, once the house is sold and I have banked the proceeds for a while, would it be better to pay off the balance of that loan with some of it?

OR is it more important to keep as much money in savings as possible in order to have more deposit when purchasing my next property?

(OR am I likely to get more favourable mortgage if I am debt free from this loan)


NB. There aren't any early repayment fees on loan

Any advice appreciated!! thanks in advance.

joedenise

Not sure whether or not you'd get a better mortgage or not but personally I'd pay off the loan as it will reduce the amount of interest you'll pay and you'll free up that monthly payment which you could add back to your savings until you're ready to buy again.

Hope that makes sense.

Denise

January2015

Pay of the loan. The interest charged on the loan is likely to be higher than any interest you will earn if you bank the money

Distant_Cousin

I thought that might be the case, but was getting a bit confused - thank you to you both!

getmore4less

If £5k would take you into a new LTV category then it might be worth keeping, depends on other factors like how fast are you saving target property cost and deposit.

Chain free does not add much to a deal and if your area has any HPI you are leaving yourself open to paying more for your new place.

you also end up moving your stuff twice.

If you don't know your new area and want to spend some time researching then break might be worth it.

Distant_Cousin

Well, I have a decent deposit, should make a modest profit on the house (got it for a very good price) - and my salary has gone up £10K from the time I got the original mortgage in 2013 (I'm also out of Early Repayment Fee period - however am paying too much interest at the moment, about £60 more a month than I should be paying if I had a new mortgage product.

Moving sooner rather than later due to neighbour noise issues. I don't mind moving twice though. It's just me, rather than a whole family.

Can you explain what you mean by "chain free does not add much to a deal", please?

I also don't know what you mean by HPI either, sorry! (tried googling it, and just get something to do with cars!)

Million_Percent

I agree with getmore4less. You need to weigh up whether the extra 5k on the deposit will enable you to get a better mortgage deal due to better Loan to Value ratio. If in doubt use a comparison site to search for mortgages based on the two levels of deposit and compare the rates.

If it doesn't help you get a better mortgage deal then pay the loan off. Firstly this will save you interest. Secondly, not having unsecured debt will improve your mortgage application. The new affordability checks can be quite thorough and some lenders can be quite tough regarding the level of unsecured debt they will allow. When we applied for our mortgage last year, our lender got twitchy that we had £6k on a credit card. But they hadn't taken my wife's income into account so it all got sorted in the end.

Distant_Cousin

Oh yes, the new checks. I think I will have to consult my mortgage broker on the whole LTV thing, before I decided to pay off the debt so they can decide what is the best option for me, longer term.

Really useful stuff , cheers.