Getting a mortgage bigger deposit vs less debt ?

Debtfreewannabee91

So as the title suggests I’m looking for some advice on what would be a better situation when applying for a mortgage.

As it stands I’ve managed to save around £30k and I currently only have 2 debts one being my car which has about £3000 left outstanding and another for a laptop for work which was a recent purchase and has around £2500 left outstanding.

Would it be better to use some of this saved money to pay off these outstanding debts or keep the savings and have a bigger deposit ?

Thrugelmir

What rate of interest are you paying on your debts?

Debtslayer

Are you paying interest on your debts?
How much mortgage are you looking to get? What is the value of the property you are looking to purchase?
What is your annual income?

anto164

It's easier to pay debts when you have savings. Harder to pay when you own a property.

I'd pay them off, ignoring any interest saved, it's more of a practical saving

bowlhead99

When you buy your property your interest rate will be driven by how much you are intending on borrowing from the mortgage company as a percentage of property value.

Meanwhile your overall "affordability" (how much they are willing to lend over what timescale) will be driven by how much disposable income you have each month - income less known commitments and their estimates of your other spending, compared to what the mortgage would cost - with the assumption that you were not fixed on a nice cheap mortgage rate and the interest rates go up significantly...

If you don't pay off your debts then you will have more cash free for deposit which means you can find it easier to get into the (eg) under 85% or under 75% or under 60% loan-to-value bracket ; basically allowing you to borrow as much as possible as long as your income (less commitments) would support that amount of borrowing even if interest rates went up to 6-7% instead of their current 2% or whatever.

So, if you have a pretty big income for the amount you want to borrow, then *not* paying off the debt will let you get the biggest loan from mortgage co, or the best interest rate for a given amount of mortgage, and "affordability" problems from needing to pay a couple of hundred quid a month on debt repayment may not even be an issue.

However if your income isn't great, having a bunch of outstanding debt which costs £x per month in payments, means you have the maximum deposit available *but* hurts your monthly affordability the most because you have this fixed outgoing of (say) £200pm which has to be taken off your net pay before the bank run their assessment of how easy it would be for you to keep paying off the mortgage on the face of rising mortgage rates.

All banks run their affordability assessments slightly differently but often have a website tool to let you see what you might be able to borrow with a given net salary and monthly expenditure on debts and commuting and childcare/maintenance, etc. You could run one of those to see whether keeping a few thousand of debts is better than paying it off and having a lower deposit for the property you want.

From a practical point of view the mortgage will be a lower percentage APR than most other types of personal unsecured debt other than 0% credit card so paying them off out of your deposit money and then needing to borrow a bit more to buy the property, is not necessarily a bad thing.

However if paying off the debt means you need a higher loan to value mortgage, which is more expensive, it would be a shame to be paying an extra fraction of a percent on (say) £200k borrowings - could cost you a couple of thousand quid or more over five years - especially if the "peace of mind" of having cleared the £3k car borrowing is only saving you £100-200 interest a year and didn't need to be done to make the monthly mortgage direct debits "affordable"

With my last mortgage application I said I would pay off £x thousand of my 0% credit card balance at or around completion, still leaving a good chunk outstanding. That made them more willing to lend to me 'affordability' wise due to lower committed outgoings. But still allowed me to hit the target LTV I wanted which would have been harder if I'd tied up more cash in settling debts.