What should I prioritise to boost mortgage prospects... paying loan off or getting a bigger deposit?

Stephenm

Below was originally posted in Loans, a commenter suggested putting it here. Thanks for reading.

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

Moneyminded

You have been in debt in the past, and still are, so from a credit history perspective any potential lenders in the future will be able to see how you handle credit and how reliable you are at paying it off. When you refer to lenders seeing that you have some credit to ensure you are a 'good' risk, what they actually want to see if that you can live within your means, have the income to be able to afford the repayments on a mortgage and have been responsible in paying back lenders previously. The fact that you have been able to obtain credit in the past and pay off your credit cards shows your approach to managing your money.

Having said that do check your credit files with all 3 credit reference agencies to ensure your credit files are accurate, ensure any errors are corrected.

So you have credit history and you can show you have paid off debt, great. If I were you I would be paying off any outstanding debt before applying for a mortgage, the sooner you clear it the less interest you will be paying.

Provided you have at least a 5% mortgage deposit I would throw all spare cash at clearing debt before bulking up the deposit fund.

djphig

I'm going to disagree with the above and reiterate the post on the Loans board.

If the loan isn't impacting your mortgage affordability drastically, it might be more beneficial to throw the extra money into the deposit as if you're able to reduce the Loan to Value that you're borrowing at, you could save a serious amount of money in interest. Once your mortgage is in place, your payments will be lower so you could then focus on repaying the loan.

In all honesty, it's worth speaking to a broker to go over the numbers. Good luck

Thrugelmir

The deposit will need to come from your funds alone not your partners.

If you can afford to. Clear the loan. Why pay interest unneccesarily?

Retired_Mortgage_Adviser

The statement below is incorrect.

There are lenders who will be open to the deposit being gifted by the partner who will not be on the mortgage but live in the property. It just needs a good broker to find the right lender for OP's circumstances.

Thrugelmir wrote: »

The deposit will need to come from your funds alone not your partners.