Pay off car finance or save for a mortgage

georgiegina20

Hi, I am new to this so I hope I have posted in the right place?!

I would like to know is it better to pay my car finance off or continue to save for a deposit for a house?

My final settlement figure is £6700 on my car which is costing me £200 a month. I have £16,800 in savings towards a deposit for a house.
Should I use the deposit money to pay the car off and still have £10,000 left and be £200 a month better off, or leave my deposit as it is and continue to pay £200 a month?
Also I am currently unemployed (won't be for long) so the extra £200 a month would be very helpful. And when I do apply for a mortgage will it look better if I don't have my car finance as an outgoing?

I really don't know what is the best thing to do.

[Deleted User]

Unless your loan is interest free, pay it off.

Willing2Learn

Hi georgiegina20 and welcome to the forum

Check the terms of your credit agreement for the car - You're looking for any penalty clauses for early settlement. If it were me, I would settle the car finance early and use the money saved in interest to boost my house fund

BakingC

Number of things to take into account. How soon are you looking to buy? If you used the savings to pay off car finance it would take nearly 3 years using that £200 a month to build savings back up.

What value house are you looking to buy? If you were looking to buy sooner than the 3 years it will take to repay the savings will your deposit be enough without the excess money in there? e.g. takes you below 90%/ 95% LTV so regardless of debts a mortgage is out of the question for the time being.

What interest rates are your savings / finance at? It is often better to pay down debts using savings if the debts have a higher interest and you do not need the flexibility of having the excess cash e.g. not having emergency fund.

Is there anything stopping you from paying the £200 a month from savings until you are reemployed? e.g. limited withdraws within the year.

foxy-stoat

Pay your finance off in full, sell the car and buy one for £2500 and drive that for a couple of years. You can save up £2400 a year and buy another car for £6000 outright in 3 years....or you will spend all your spare cash on your new home.

PRAISETHESUN

The interest rate for your car finance is likely higher than any savings rates available at the moment, so it makes sense to pay off the loan first rather than set aside the money for a deposit now. There may be extra fees for paying off the loan early, but it's still probably cheaper in the long run to do this.

Also it'll help that you won't have a loan on your credit file which may make it easier to get a more competitive mortgage, possibly saving you even more down the line

georgiegina20

Hi

I am not sure how to reply so hopefully this is it!
I am looking to buy a house within a year ideally. All depends when I get my full time job.
I am also moving back in with my parents to help save and when I get my job my starting salary will be £25,000 so if I am still at my parents I can build my deposit back up that way.
I have no idea about interest rates etc (just don't get it!) But I know I pay alot of interest on my car and get hardly anything for my bog standard savings account and first time buyer ISA.

If it will look better when I apply for a mortgage then maybe paying the car off is best?

DrEskimo

You say your final settlement figure is £6,700, do you mean your balloon payment? How long is the agreement and how far into it are you? If the £6,700 is your final payment, do you know what you owe today to settle the finance (settlement figure)?

Herzlos

Your mortgage affordability will likely factor in existing debt, so your "mortageable amount" is probably the same either way, with £10k in cash, or £16k in cash and £6k in debt.


Paying off the car means you can put the £200/month into savings to build it back up whilst saving the interest on the payments, which are almost guaranteed to be higher than the rate on your savings account.