Best to repay debts before arranging mortgage?

nik_k

My wife and I are looking to purchase a house. This will be dependent on a mortgage. Our deposit for the purchase (HTB EL) is mainly based on an inheritance, which has just been received into our bank account. Currently we have approx £5.9k in credit debts, split between a consolidation loan and some credit cards. We will be topping up the inheritance with some monthly savings to get to our deposit goal.

We will have reached our deposit goal next month, assuming that we use the inheritance plus the savings. However, I'm thinking that it might be best to repay the loan and pay off the credit cards from the inheritance funds now, which would mean that it would take longer to reach our deposit goal.

Is my reasoning correct/sensible? Would it be best to apply for a mortgage in 3/4 months with no debts, or would applying for a mortgage in a month's time with these debts make little difference? The purchase price is going to be approx £300k, meaning that the mortgage amount would be approx £225k. Also, would there be any guidance about how long to leave between settling the debts and submitting a mortgage application? Do we need to leave time to allow for credit files to be updated?

Thanks in advance for any help offered!

sal_III

If it's serviced debt with no defaults/DMP/CCJ etc. It's OK, the only affect it will have will be on affordability as you have monthly outgoing commitments.

If it will only take 3/4 of months to repay £6k of debt, why did you get in this debt in the first place?

If you are barely scraping the deposit next month I would advise you to accumulate some additional funds to facilitate the expense of home buying, like solicitor costs SDLT etc.

Retired_Mortgage_Adviser

It depends on how close you are to your affordability limit. If you are well within in, the debt is unlikely to be a problem.

If you are close to your upper limit, then it will definitely have a disproportionate impact.

You don't necessarily need to wait for your credit files to reflect cleared debt. Some lenders will accept an undertaking that you will clear it before completion, some will be happy with statements showing it has been cleared, etc.

I would definitely recommend that you see a broker to get an idea of affordability.

nik_k wrote: »

Would it be best to apply for a mortgage in 3/4 months with no debts, or would applying for a mortgage in a month's time with these debts make little difference? The purchase price is going to be approx £300k, meaning that the mortgage amount would be approx £225k. Also, would there be any guidance about how long to leave between settling the debts and submitting a mortgage application? Do we need to leave time to allow for credit files to be updated?

nik_k

Yeah, serviced debt, no complications. It's just an accumulation of Buy Now, Pay Later mentality. In either case, the debts will be repaid before commencing the mortgage payments. It's just a question of whether the affordability would be negatively considered at this stage, even though the actual debts would have been repaid prior to the actual mortgage completion. I appreciate the lender would rather see satisfied debts, rather than running the risk of debts not being satisfied prior to completion...

Additional costs have been factored in separately. Developer will be covering legal costs and SDLT

nik_k

Retired_Mortgage_Adviser wrote: »

It depends on how close you are to your affordability limit. If you are well within in, the debt is unlikely to be a problem.

If you are close to your upper limit, then it will definitely have a disproportionate impact.

You don't necessarily need to wait for your credit files to reflect cleared debt. Some lenders will accept an undertaking that you will clear it before completion, some will be happy with statements showing it has been cleared, etc.

I would definitely recommend that you see a broker to get an idea of affordability.

Affordability should be OK, we have seen an adviser recommended by the developer, who said that £340k is our upper limit.

I'm thinking of approaching some of the brokers on here, as they've been recommended in posts

Retired_Mortgage_Adviser

I would always go with a whole of market independent broker. If fees is a concern, there are plenty of fee-free brokers as well.

nik_k wrote: »

Affordability should be OK, we have seen an adviser recommended by the developer, who said that £340k is our upper limit.

I'm thinking of approaching some of the brokers on here, as they've been recommended in posts

MortgageMamma

Retired_Mortgage_Adviser wrote: »

I would always go with a whole of market independent broker. If fees is a concern, there are plenty of fee-free brokers as well.

I disagree. I think fee free brokers are a terrible idea for a first time buyer. You get what you pay for - fee free brokers have to take on a lot more cases to make a living, you don't always get the best service or detailed advice from them. I know, I used to be one.

I think for FTB's they should get this right first time, particularly given there are background debts and its a HTB transaction. Good experienced advice and the right insurances now will set them up well for the future.

Fee charging brokers don't charge a fortune, its a top up to the pitiful income mortgage lenders pay us for a professional job.

LRmortgage

I agree with Mortgage Mumma. Pay a small fee to a broker for a detailed professional service.

Retired_Mortgage_Adviser

You are disagreeing with something I never said

My point was that there is no need to avoid using a broker just to save on any fees. As brokers, surely we can agree that consulting a free broker is better than no broker at all?

amnblog

NiK

If this is a H2B case, timing is about when the property is available to reserve.

The existing debts are not an issue if affordability works with them.

Don’t do anything until you have taken advice from a mortgage broker.

getmore4less

£225k on £300k with HTB is that the full 20%

£225k Mortgage
£60k H2B
£15k deposit

With affordability being OK, if you can pay off £6k of debt in 4 months and your rent that should give a decent chunk to put towards the mortgage debt.

I would analyse the non HTB option with overpayments over 2 and 5 years to assess the level of house price rise that wipe out the H2B benefits.

What is the target date for the new builds you are looking at?

What rate are your debts?