Should I prioritise repaying my personal loan or building up a deposit?

Stephenm

First post. I did search before posting but couldn’t seem to find the answer to my exact question.

Last year, after getting ‘persistent debt’ letters, I (finally) decided to actually pay off my £12,000 of credit card debts rather than just pay the minimum monthly payments. I’ve been going at it really hard, and with my partner’s help have been paying off £2125 per month. Come the end of February I’ll have cleared it completely.

We’re also going to want to move into a new home in summer 2021. We ideally want to keep our current home (mortgage in partner’s name only) to rent out, so I’ll be applying for the mortgage solely in my name to benefit from my HTB ISA bonus (currently ~£4000 in it, and paying in £200pm) and the first-timer stamp duty relief. Based on the simple (i.e. only entering salary and outgoings) affordability checks online it looks pretty certain I’ll be eligible for the ~£130,000 I’ll need for the property type we want in the area we’re in. (This obviously assumes no major disruption to the market)

I also have a personal loan from zopa, which has a fixed payment of £172 per month. If I continue paying that until it’s cleared I’ll pay a total of another ~£8250 over 4 years, whereas if I pay it off early I save around £1200 of that (based on early settlement sum as of today)

Question: Should I prioritise clearing the loan (which will leave me with no debt and no credit) or pump the money into my deposit savings? I’m particularly interested in what mortgage lenders will look more favourably on... lower deposit but zero debt, or higher deposit with debt? Either way, we’re going to carry on sticking to the same budget, so will have £2125 per month to either pay off debt or add to savings... we just don’t know where it’s going to be most effective.

General advice seems to be “pay all debt before saving,” but then other articles/thread here also say “mortgage lenders like to see you with some credit, so they are reassured you’re a ‘good’ risk.”

Any advice for me and my specific situation please?

Thank you in advance

[Deleted User]

You're unlikely to be earning a higher rate on your savings than on your debts, so get the debts cleared. As well as making your poorer, they will also reduce the amount you can borrow.

Lenders like to see you with some credit - not debt.

[Deleted User]

A small personal loan isn't going to impact your affordability that much. A larger deposit means a lower LTV and if you save enough to start moving up the brackets (90% LTV, 85% LTV, 80% LTV, 75% LTV, etc) then the mortgage rates become more favourable. A lower rate on a smaller mortgage, because you've put in a larger deposit, could save you thousands in mortgage interest since you will be borrowing the money over a longer period.

You might be better asking a board guide to move your thread to the Mortgages and Endowments board where a few mortgage brokers regularly post.