Save for deposit or reduce debt - Advise please on my situation as it's not clear

Ultima1

Hi, I could do with some sage advice please as I haven’t a clue about the best thing to do.

Situation

I’m 47 years old and currently renting. 

I have 2 loans

£7000 loan expires 2/11/23 2.5% APR- Monthly £268

£10000 loan expires 1/3/24 3.5% APR Monthly £335

I have savings right now of £6,700

I save £650 per month currently 

I’m on track to save £10k by the end of the year.

My query is this. I was initially going to use £10k for a 5% deposit on a house, already been AIP, for a £200k house.

I am now wondering whether it’s better for me to pay off the £10k loan which means I would be able to then save nearly £1k a month but obviously that puts me back another 10 months to save another £10k for a house deposit.

With the way house prices are going and the fact I’ll be 48 next year I’m concerned about getting a mortgage as I’d need 20-22 years term and I’m getting close to that not being viable.

Therefore what does everyone recommend?

1. Stick with saving the £10k till end of the year and get house
2. Pay the 10K loan off at the end of the year and start over
3. Pay the 10K loan off at the end of the year and start over and then save to pay off £7k loan then get mortgage in 2 years time.

Thanks in advance for any advice, I can’t tell you how much I’d appreciate it.

AdrianC

Ultima1 said:

Hi, I could do with some sage advice please as I haven’t a clue about the best thing to do.

Situation

I’m 47 years old and currently renting. 

I have 2 loans

£7000 loan expires 2/11/23 2.5% APR- Monthly £268

£10000 loan expires 1/3/24 3.5% APR Monthly £335

I have savings right now of £6,700

What are the current balances on those loans?
You have 28 payments left on the first, £6,432.
You have 32 payments left on the second, £10,720.

That suggests your current balances are around £16,000, since those will include interest yet to be incurred, which means that - net - you owe around £9,300.

Stop thinking of them as separate pots. Mortgage lenders certainly won't join in that delusion.

I save £650 per month currently I’m on track to save £10k by the end of the year.

No, it means you're on track to have repaid your debt by about February and be at net zero, if you add that £650 to your current monthly repayments.
Then you can start saving.
At your current rate, you should have £10k saved by about August next year, assuming you put the current monthly repayments into your savings pot.

How much interest are you getting on that £6,700? 0.5% at most? So your pretence that they are not different sides of the same coin is costing you 3% APR on that £6,700 - £200/year, perhaps more.

longtimelurker2020

@Ultima1 we have a lot in common. What I would do in your shoes:

- Use the £6,700 savings to clear the £7k loan, freeing up £268

- Apply the freed up £268 to the £10k loan as an overpayment (check that your lender allows overpayments on your loan product, and you’d have to be super disciplined to ensure you don’t spend the freed up money on other things)

this should almost halve the time to repay the £10k 

I’d do this because the loans will be considered in your full mortgage application anyway, and will affect your affordability assessment 

Ultima1

Hi Adrian,

Many thanks for replying.

The settlement figures, if I paid off today are, £10118.18 & £7203.18 = £17321.36

I agree that my savings are at 0.5% but my thought is not necessarily saving money on the interest I pay on my loans but whether I use the lump sum at the end of the year to get a mortgage and hence get on the property ladder or wait another year or 2 to pay off loans and then start to save for a deposit again. 

I see time as ticking by in terms of me getting a mortgage so perhaps that's skewing my vision but I see it as a fundamental consideration right now. Happy to be wrong hence why asking for advice. Thank you.

Ally_E.

Here's a handy flowchart to help understand what to do https://ukpersonal.finance/flowchart/#Have_you_seen_the_flowchart_⤵️

Ultima1

Ally_E. said:

Here's a handy flowchart to help understand what to do 

Thank you Ally_E 🙏🏻

AdrianC

longtimelurker2020 said:

@Ultima1 we have a lot in common. What I would do in your shoes:

- Use the £6,700 savings to clear the £7k loan, freeing up £268

- Apply the freed up £268 to the £10k loan as an overpayment (check that your lender allows overpayments on your loan product, and you’d have to be super disciplined to ensure you don’t spend the freed up money on other things)

this should almost halve the time to repay the £10k 

I’d do this because the loans will be considered in your full mortgage application anyway, and will affect your affordability assessment 

Pay the higher interest loan first. 2.5% on the smaller, 3.5% on the larger.

steampowered

Could be worth having a chat with a mortgage broker to understand your options? They should know how different lenders would approach your situation.

Mortgage lenders look at things from two angles - (1) your LTV ratio, your deposit must be at least 5% and (2) the affordability of your mortgage compared with your salary.

I had always understood that lenders would look at debt as reducing your monthly income, because you need to make regular repayments. 

So, where you are limited by the size of your deposit rather than by the affordability of the mortgage, it might not make sense to pay off the debt.

Ultima1

steampowered said:

Could be worth having a chat with a mortgage broker to understand your options?

Mortgage lenders look at things from two angles - (1) your LTV ratio, your deposit must be at least 5% and (2) the affordability of your mortgage compared with your salary.

I had always understood that lenders would look at debt as reducing your monthly income, as you need to make regular repayments.

So, where the limiting factor is the size of the deposit rather than the size of the mortgage,  contrary to what some other posters are saying, it does not always make sense to pay off the debt.

Thank you. This is my concern as I believe I can only get a mortgage till 70 and after 66 need to prove income meaning I can only get a 22 year mortgage term at max. 

pinkshoes

I agree with @AdrianC that your debt and savings are NOT two separate pots, but just ONE pot.

So in reality you owe over £10k and have no savings whatsoever. 

Saving £650 a month is fab, as you can then pay off your debt really quickly. THEN start saving for a deposit on a house...

(and don't forget to factor in other costs when buying like solicitor fees etc...)

MovingForwards

If the £6.7k is all the money you have, I'd be reluctant to throw it all at the debt as it's also a safety blanket.

As you've got £650 extra each month, can you make overpayments to clear one loan quicker, then use that £650 + the money now freed up from the repaid loan to clear the 2nd one.

Lending into retirement isn't about working past retirement age / pension age but having sufficient pension to cover the mortgage payments by way of a suitable private pension.

Have a look at mortgage lending calculators to see how the different lenders view the loan repayments, don't do a DIP.