Starting out now for a deposit - save for 4 years or aim for 5%?

DMP45

Hi, I've been a long time lurker and posted back in 2013 about my self inflicted financial situation.

forums.moneysavingexpert.com/showthread.php?t=4563581

Things are better now but its been a bumpy road. I'm looking for a bit of advice on my current situation - if anyone is able to lend some advice please?

I have 3 defaults, all dated around December 2013 - two settled in full with a remaining balance of about £10000 and a credit score of 650. My income has increased to a slightly more comfortable level where I'm now able to clear the debt and save at the same time.

Obviously I probably won't get touched (at least not with a competitive rate) for a mortgage until these have dropped off at the end of 2019, by which time the £10k balance will be zero.

I'm 28 and currently renting with my girlfriend, with the view to buy somewhere once we both have a decent sized deposit saved. The aim at the moment for myself is ~£15k with the HTB ISA/Lifetime ISA and an additional £15k-20k in savings over the course of about 4 years. With a view to buy in 2020.


My girlfriend should manage about the same - so we'd be looking with at least a £60k deposit.


My questions are:

• Would it be better to just save away for 4 years and aim for a large deposit and not think about Help to Buy?
  My perceived pro's and cons:
  • Pro We'd be more likely to get a better mortgage rate with my debts truly in the past.
  • Con House prices continue to rise at a rate that means our deposit gets us less for our money.

• Or save a 5% deposit and see in a years time what we may be able to get?
  My perceived pro's and cons:
  • Pro We'd be able to get on the ladder sooner, possibly gaining some equity in the property and be paying what we currently pay in rent, into a mortgage. If repayments were similar to current rent payments, it would mean we could overpay.
  • Con Because of my financial history, it may mean we would have to settle for an unattractive mortgage rate.

Any advice would be brilliant!


Thanks


DMP45.

audigex

First up, forget this:

I'm now able to clear the debt and save at the same time

Clear the debt THEN save. Otherwise you're just throwing money away on interest. Other than an emergency fund, there's absolutely no point saving while paying interest on debt. Over the same time frame, you'll end up on a fairly hefty profit by paying the debt first.

Other than that, I'd say that yeah it probably makes sense for you to just hammer the savings until your defaults drop off your file. Considering you need at least some of that 4 years just to pay off the debt, and considering that the lender will likely want to see that the debt has actually gone (rather than just being part of a borrow-pay-borrow-pay cycle), I think you're basically in a position where getting a mortgage before 4 years time is likely to be tricky anyway.

You could probably look at pushing things a little faster and getting a not-very-favourable rate in ~3 years, or you can just wait until 3.75 years from now. As far as I can see, you're basically only actually going to have to wait ~9 months, and you'll be in a much stronger position by doing so (no debt, no defaults, a much better rate)... plus the additional savings for your deposit.

By pushing things as hard as you can for a 5% deposit you're right that you'd be starting to get a little equity - but with a probably-crappy rate and the way a mortgage is weighted with interest/capital payments, you're really not going to be getting much equity in the intervening time period. Especially when you're still paying off debts etc.

Unless you rent is unusually high or you're truly desperate to buy, I'd stick with hammering the debts first, saving as hard as you can and then buying as soon as you like after the defaults drop off your file. That then leaves you free to get the best rate, with a better LTV, no debts to either handle in the application process or budget for afterwards... and I suspect that with the better rate and paying off your loan faster, you'd actually end up with at least the same if not more equity in the property in 6-7 years time.

TL;DR - personally, I'd wait. Your situation is going to improve a lot in a known timescale, and I think you'd be better off (both in stress levels and potentially financially) by waiting until that point.

DMP45

Thanks for the reply - we're not desperate to buy right this second, and for what we have and where we are (central Bristol) it's not extortionate. £675 for a 1 bed flat and there's a 5% a year cap on rent increases with our letting agency. We've looked at moving away but prices are creeping up outside of Bristol too - and add to that commuting costs for our jobs and it becomes pointless moving away.

I'm trying not to look too far ahead as all I can do right at this second is just save as much as I can. Circumstances will change and it's hard not to worry that you're not making the right decisions when you hear and read the endless news on house prices increasing.

audigex wrote: »

First up, forget this:

I'm now able to clear the debt and save at the same time

Clear the debt THEN save. Otherwise you're just throwing money away on interest. Other than an emergency fund, there's absolutely no point saving while paying interest on debt. Over the same time frame, you'll end up on a fairly hefty profit by paying the debt first.

Sorry, I didn't mention this anywhere but the interest has been frozen since the account went into arrears/default and the balance is just the amount borrowed without interest. I'm aiming to clear the balance by the latest of mid-2018 to give my credit file chance to start making a recovery before the defaults drop off. I could focus all my finances at clearing this sooner - but I'm not sure how beneficial this would be considering its not costing me anything.

System

My understanding is the defaults will drop off your file 6 years from when the account was Closed and not the date of the default itself, so by not clearing the account ASAP it will remain on your file longer

Best thing to do is clear the debt ASAP, it will help in the long run by having a clear file which means you can start rebuilding it by using a credit card sensibly (clearing in full each month) to show lenders you are responsible and sensible with your money. It'll also have the emotional affect on yourself by knowing your debt free which is a heavy weight lifted off your shoulders

Thrugelmir

The lenders you defaulted on will restrict your mortgage options. These no limitation as to how long they can retain you on a black list. Very much at their discretion.

DMP45

AlexandLauren wrote: »

My understanding is the defaults will drop off your file 6 years from when the account was Closed and not the date of the default itself, so by not clearing the account ASAP it will remain on your file longer

Best thing to do is clear the debt ASAP, it will help in the long run by having a clear file which means you can start rebuilding it by using a credit card sensibly (clearing in full each month) to show lenders you are responsible and sensible with your money. It'll also have the emotional affect on yourself by knowing your debt free which is a heavy weight lifted off your shoulders

Interesting - I've heard mixed things on this. It was my understanding its 6 years from the date that the default was registered. I've just had a quick search and found this:


debtcamel.co.uk/debt-default-date/

Only the first default date for a debt matters

There can only be one default date for a debt. Sometimes your credit file shows a default marker each month that it is still in default – but here it is the first default date that matters and the whole debt will disappear six years after the first default.
If a debt is sold to a debt collector, then the new creditor should use the same default date as the original creditor did.

Thrugelmir wrote: »

The lenders you defaulted on will restrict your mortgage options. These no limitation as to how long they can retain you on a black list. Very much at their discretion.

It was one lender and it was with Nationwide. Will they share this information with other lenders - effectively blacklisting me entirely?