Mortgage Application - Loan v Credit Card

Jond

Hi all,

My wife and I are in the process of selling our house, and at some point (hopefully) in the not-too-distant future we're going to have to apply for a new mortgage.

We've spoken to a mortgage broker/advisor, and we meet the affordability requirements. But I want to tidy up my credit file and make it look as appealing as possible.

We have cleared a lot of debt over the last two or three years, which had accumulated when I retrained for a new career. We were recently gifted £10,000 which cleared our debt consolidation loan with HSBC. Currently outstanding are:

two small loans for cars (about £13k total - with interest - with £380 a month repayments)

£4200 MBNA card on 0% deal

£1300 on Halifax card 0% deal

£1500 overdraft, which I currently use each month

We have a joint income of around £70k, and are looking at a £250,000 mortgage with a 10% deposit.

My question is, should I extend one of the small loans that I have, and pay off the cards and the overdraft? This will incur more interest, but if it looks better to a mortgage lender, then I will happily do it. I could spread the payments over a longer period, and therefore actually reduce my monthly outgoings.

I know that I need to clear the overdraft as a priority, and so I may have to add to one of the loans to do that quickly. Any advice would be appreciated!

foxy-stoat

I do not think taking out a loan while your on a 0% interest deal is the best move.


Just clear your overdraft first, by reducing the limit each month by a few hundred once you get paid and try and budget a little better for a while. How long have your been in your overdraft for £1500 for?

Jond

We're against the clock a little, as we're looking to move in the next few months. I've been in overdraft for what feels like forever. It was £2000, but it's down to £1500 now. I could probably clear it in about four months, but I know the mortgage company will want to see three months of bank statements, which means that we will be stuck for a good seven months (four months to clear the OD, three months of 'good' statements after to show).

Thrugelmir

Jond wrote: »

I know that I need to clear the overdraft as a priority, and so I may have to add to one of the loans to do that quickly. Any advice would be appreciated!

Suggests that it is more a question of budgeting better. Rather than simply taking out yet another consolidation loan. Having recently cleared one this should allow you to reduce your debts further and quicker.

Jond

Thrugelmir wrote: »

Suggests that it is more a question of budgeting better. Rather than simply taking out yet another consolidation loan. Having recently cleared one this should allow you to reduce your debts further and quicker.

Yes, you're right. We do have about £600 of disposable income available now. But as I mention above, it would take three or four months to clear it, and then we'd have to wait three months before applying. For various reasons, this is probably longer than we can wait.

We budget carefully each month, using YNAB. Every penny is accounted for these days, which is why we've been able to clear a lot of debt.

copperclock

It was my understanding that, in terms of monthly affordability calculations, the mortgage lender will take the actual loan repayment if it's a loan, or a percentage of the balance if it's a credit card. I can't remember what percentage they use. Hopefully somebody will be along soon who knows.

I think it means that short-ish term loans end up eating into affordability more than the same amount on a credit card debt, though.

I would agree that you need to tackle the overdraft before anything else. Could you use a money transfer credit card to 'pay back' the overdraft now (therefore brightening up the bank statements) and then throw your £600pm at that card?

Jond

copperclock wrote: »

I would agree that you need to tackle the overdraft before anything else. Could you use a money transfer credit card to 'pay back' the overdraft now (therefore brightening up the bank statements) and then throw your £600pm at that card?

I've just checked my cards, and I don't have a money transfer offer on them at the moment. I could apply for another one?

kingstreet

If you meet lender affordability as things are, leave well alone.

People try this micro-management and end up making a mess of it with recent searches for further unnecessary unsecured credit.

Stability is the key.

lopsyfa

I will advise against taking new loan or credit card very close to mortgage application. This may be more of a problem for you. I don't think you need to wait for any x months after clearing the loan before you can apply for a mortgage.

We are about to complete on a house and cleared the credit card and car finance after putting in the application. All Halifax wanted to see was the final settlement figure showing the debts on the credit file are now cleared and this has no effect on affordability. In fact, Halifax was ready to accept proof of money in bank to show we can clear it before completion.

If I were you, I will pay the £600 towards the overdraft each month and clear it in 2.5 months and then start overpaying on the car loan. With your combined salary, you should be able to easily afford a mortgage of 250k even with the debt.

Another option may be to sell the car for now and clear the debts completely and buy a run-around for like 2k. Cars are depreciating asset and you can always buy a better one in a year or two once the mortgage is secured.

Jond

Thanks - some good advice there. The only thing that sticks in my mind is that the mortgage company will look at my loan repayment - not balance. So I could extend the term of my loan and thus borrow a little more but at a lower monthly repayment.

Probably best just to leave well alone though and pay off my OD as I can.

lopsyfa

Yes but paying the overdraft has similar effect (reducing total monthly payment) while also saving you some interest. Once that is paid, overpay on the car finance and ask them to keep the term the same and reduce your monthly payments. Those two actions combined should reduce your total monthly payment more than you can do by getting extra loans (essentially getting into more debt) and will leave no further trace on your credit report. And the underwriters may still look at your total debts to make their final mortgage offer so borrowing more may not even achieve what you are trying to do.

I also think you are over-thinking it, as I stated above, I don't think you'll have any problem with 10% deposit on a combined salary of 70k for a 250k house even with your current debt (Loan to income ratio of 225000/70000=3.21 is pretty decent).