Manage debt before mortgage application

DJCJ

Hi

Can someone 'in the know' please advise on what would be the best option in terms of how a lender would view current debt levels.

The situation is as follows: My wife and I are looking at moving house soon. We have approximately 15K debt spread across 4 different credit cards in both of our names. We have looked at our finances and contacted L & C and received a decision in principle based on our current financial standing for the amount we need/want.

However, our car has just gone kaput! We therefore need to get a new car fairly urgently. My wife's parents have stated they want to gift us 15K to buy a car. We have therefore arrived at the following 2 options:

a) Leave our finances as they are and just buy a car for 15K.

b) Use the 15K to clear all credit card debt and then take out a PCP for a new car.

Currently the 15K across four credits cards has a minimum monthly payment of £270 (all 0% balance transfer cards so no interest). The PCP for the car we want is a payment of £250 per month.

So, i'm wondering what option would look better to a mortgage lender; having 15K of credit card debts (four cards) with monthly minimum payments of £270, or zero credit card debt but a PCP agreement for a car at £250 a month?

I understand the best option would be clear the credit card debt and save to buy a car, or clear most of the debt and buy a cheap run around, but we have ruled out these options.

Thanks for any advice/opinions

middleclassbutpoor

It probably depends on how 'soon' you need the mortgage.

Personally, I would buy the car with cash and keep your finances as is - to save £20 a month is not worth creating potential headaches.

As an aside, it doesn't bode well that you are having to revert to credit to replace your car - appreciate you may have savings which are going towards the house etc but you should get those credit cards cleared as soon as possible and get some savings behind you for emergencies.

£250 a month = 3k a year, those credit cards are unlikely to be 0% forever and you can't count on 0% deals being around for ever.

zagubov

Those credit cards need clearing, at least partially. I'm surprised you need a new car. It reads as if you just need A car. Getting a loan for a new car isn't something many people on this forum would recommend. Twice I've flown or taken a bus over 400 miles to buy good second-hand cars in another city and saved serious money.

DJCJ wrote: »

I understand the best option would be clear the credit card debt and save to buy a car, or clear most of the debt and buy a cheap run around, but we have ruled out these options.

I'd revisit those options and see if you can find workarounds for what's stopping you taking them.

It might not yet be time to ask yourself if you're really serious about getting a mortgage at this point, but I share middleclassbutpoor's concerns about your attitude towards handling debts for depreciating assets. Owning a home can be a proper investment in your future.

MovingForwards

Pay £13k off the debts to bring it right down, £1k budget for a car, £1k for tax/insurance and float money for the car.

A new car is not priority and your debt ratio may concern a mortgage company enough to reduce any offer.

Thrugelmir

Don't spend £15k on a car. Use a chunk of the money to clear some of your debt.

How are you funding your house move. On borrowed money?

enthusiasticsaver

I too would be concerned that you have £15k of unsecured debt and are looking to move house, itself expensive and presumably involving a larger mortgage? If you are downsizing though or going for a smaller mortgage that would make more sense. Regardless it does not seem like you can afford £15k for a car but if the money was gifted on the understanding you buy a car for that value that is what I would do. I certainly would not take out PCP the most expensive way of buying (or not buying) a car. You are left with no asset at the end and are sucked into a lifetime of these sorts of deals.

I do think you need to address the issue of how you intend repaying the credit cards though before you take on a bigger mortgage and as others have said there will be costs so do you have savings to cover this?

DJCJ

zagubov wrote: »

It might not yet be time to ask yourself if you're really serious about getting a mortgage at this point, but I share middleclassbutpoor's concerns about your attitude towards handling debts for depreciating assets. Owning a home can be a proper investment in your future.

I already have a mortgage at this point, maybe I didn't make that clear in my first post, this isn't a first time buyer purchase, we are moving home.

MovingForwards wrote: »

A new car is not priority and your debt ratio may concern a mortgage company enough to reduce any offer.

You state our debt ratio may concern a mortgage company. Our current debt ratio has already been accepted, and decision in principle offered. The question was would it be best to leave the debt 'as is', or change the debt from credit cards to a car PCP.

Again, I understand the purpose of this forum is for people to advise on 'save, save, save', which is why I tried to mitigate these comments by stating we have ruled out buying a cheap banger of a car. I was wanting advice based on the two specific options given as to which would be the best between the two, not to have options three, four and five thrown into the mix.

Is anyone else able to comment on the two specific options?

Nebulous2

There are two issues - the moral one and the financial one.

Morally if your in-laws are gifting you money to buy a car that's what you should use it for.

Financially your credit cards aren't costing you anything on 0%. PCP is an expensive way of buying a car. You'll pay interest on it and need to raise a balloon payment or a new deposit at the end (or buy a cheaper car in cash!)

Read some of the PCP threads on here for the arguments, but most people are against them.

So for me the 'right' choice, from a very limited menu is the same, both financially and morally, buy the car and keep the credit cards.