Mortgage while in debt?

Joorm

Hi all
I would appreciate some advice please...
Situation: I own a property which I rent out for slightly more than the mortgage is. I'm currently living in my partner's house which is inexpensive but a huge commute to work/ friends/ family. We really want to move- buy a house together closer to work. I would LOVE to be sorted by Christmas.
I have been saving and have inherited some money so currently have about £16K in my current account. However I have about £10K debt on 2 credit cards.
Would it be better to use the money to clear the debt in full? (and delay any house purchase while I save a deposit.)
Could I clear some of the debt and still have some deposit left? Or would a lender be refuse a mortgage if I have anything on a credit card? I was thinking of using £6K to pay off part of each card which would leave me with £10K.
Advice would be really appreciated! :j
Jo

RubyHouse

Getting a mortgage whilst in debt is absolutely possible. However, credit card debt is seen as a much higher risk than a loan for example as there is no fixed limit. That £10K might double after a few splurges meaning your financial commitments are leaving less wiggle room for mortgage repayments.
In order to assess whether your deposit would be enough, we need to know what kind of house prices you are looking at.
You also need to consider your affordability, assess your incomings and outgoings, if you were to take a second mortgage and rates increased to 10%, could you still afford the repayments for both houses?

ACG

It really depends on the figures.
If you are looking to purchase the most expensive property you can get yoru hands on, then it is probably better to clear the debt (or at least part of it).

If you are looking for a Mortgage of say 4x your income, then it will probably not make too much of a difference whether the debt remains (although without knowing your incomes and repayments, that is just a generalisation).

Have a chat with a broker. But having debt in itself is not a problem. I moved house last year and had £2k on a credit card and a car loan. Providing it passes affordability it should be fine. Some lenders do have debt to income calculations which you may need to be wary of but in the main you should be fine.

need_an_answer

The house that is rented,is that in your name?

Does your partner also own the house they live in?


Are you looking to sell either that house or the rental house?

You need to remember that owning those will possibly have an effect on the amount of stamp duty you would need to pay if you were to make another purchase.

letitbe90

It's very possible, it all comes down to debt to income ratio once mortgage is factored in a long with all your other debts. As long as it is below ~42%, it is fine.

It is probably good practice to become debt free and wait, but there may be instances that it might be more beneficial to get the mortgage now - you'll know best with regards to that.

ACG

letitbe90 wrote: »

It's very possible, it all comes down to debt to income ratio once mortgage is factored in a long with all your other debts. As long as it is below ~42%, it is fine.

Where does that figure come from?

I would personally stick to affordability calculators and also check the rules around debt to income calculations (in terms of unsecured debt compared to your income) - or speak to a broker to do the donkey work for you.

Brock_and_Roll

This is the MSE forum guys....


We have a poster here who has £16k in a current account whilst simultaneously paying (presumably) 15%+ on £10k of credit card balances.


So at present, piddling £150+ a month down the toilet in return for nothing!


Get the CC balances cleared now. Will save you money straight away, and in the long run in terms of getting a better mortgage rate.


To parody Python, "moving in for Xmas" Why? One usually anti-climatic day of the year is no the basis for long term financial planning!

hazyjo

Are you paying interest on the CCs? If so, it's a no-brainer. Clear the debt. Yes, it more than likely will affect what they will lend you - not just the amount you owe, but extra allowance for interest and risk. As mentioned above, if you're not wanting to borrow the max or near to it, it's not going to make much difference really, but it's the interest that would be upsetting me. Must be loads extra each month.


When I bought with my now-ex, he had around £10k on cards and, even though it would have been guaranteed to be cleared when his flat sold (same time as buying new house), they still knocked a substantial amount off what they would lend us.


You're basically paying to borrow money that you already have.

letitbe90

ACG wrote: »

Where does that figure come from?

I would personally stick to affordability calculators and also check the rules around debt to income calculations (in terms of unsecured debt compared to your income) - or speak to a broker to do the donkey work for you.

It is an industry standard ratio used in most lender algorithms when factoring in Total Debt Service of an individual. Some lenders may be more lenient and others may be more stringent (e.g. 36%), with sliders based on for example LTV amongst other factors. It is very very unlikely for you to get a mortgage if your Total Debt Service (including mortage you are applying for) breaches 42%.

This is just one part of the assessment, the lender will have other criteria as well.

ACG

I have never come across that before, I have worked for 2 banks and as a broker for 5 years. But I suppose I was never in a job where I needed to know that calculation. It either passed or it did not, with a bit of a grey area in between if it the case a was an exceptionally good one.

avacapri

clear the cards way too much interest, and get some advice re the mortgage what is happening to your partner's house, who is going on the new mortgage etc

also think about a prenup/deed of trust