Should I use money to put more in mortgage deposit or to pay off debts?

namieco

Me and husband are saving up for our first deposit. Time is against us so we are hoping to take advantage of the 5% deposit offerings to get a house ASAP (baby on way and am in one bed flat at the moment).

We have also been paying off our debts in order to get the best chance of a good mortgage deal. We have a combined 7k across all credit cards and overdrafts. 

Would that money be better spent on the deposit, or on paying off our debts? 

K_S

@namieco You need a minimum 5% deposit to stand a chance of getting a mortgage. Without that, the debt won't make any difference to your chances.

A 7k background debt is likely to make a material difference only at the margins or if it's significant in comparison to your income.

So if you're in hurry and want to buy sooner rather than later, you need to know 
1. What is the minimum deposit you need to get to.
2. What level of background debt will stop you from borrowing what you need.

Bookgal88

Paying off debts. You'll have to declare your debts on a mortgage application, and the debt will make you less attractive to a lender/might make main stream lenders off limits to you (although I'm not sure at what debt level this becomes an issue). 

grumiofoundation

What interest (if any) are you paying on the debts?

How long do you think you will be saving for?

if you don't already have one and you think it will be >1 year (and you are both eligible) you should look at using a lifetime ISA. up to 1k each free money for government - but has to be open for 1 year before can use so if you think will buy before then might not be able to use.
(Might as well open with minimal deposit £1-10 anyway to get the 1 year clock ticking in case things change). 

https://www.moneysavingexpert.com/savings/lifetime-isas/

Emmia

Pay off debts - your deposit is to an extent gained by having debt, since you have put money into savings, rather than paying what you owe.

MrsBrush

Pay off debts, as this come off what you can borrow one way or the other. the lenders will either take the debt amount from income and allow you a multiple of the net figure, or they will take off the monthly debt payments and your affordability calculation is reduced - in both cases affecting how much they will lend to you. I think it is better to go in debt -free (or as close as possible) before applying for the mortgage. And when you have the new house there is always unexpected costs popping up, for example, you don't want to be stretched to your financial limits, still paying off your historic debts with a new baby and a dead boiler you cant afford to replace in the middle of winter!!

Look at the debt-free forum to find ways to clear the debts quickly and start your savings pot asap. 

namieco

We almost have our 5% deposit already, in a Lifetime ISA. We are hoping to have the rest by the end of the year, and hopefully most of the debts paid off too by then.

The debts are just credit cards and overdrafts with regular bank, I'm not sure on the exact interest but should be pretty average.

I just wanted to check whether it would be better to get closer to a 10% deposit, or better to go 5% and carry on paying off debts. Our credit scores are fairly average, once we pay off these credit cards they should be above average/good, but we will be able to get these down at least to 40% by end of year.

In case numbers help, we are going to try to look for a house for under 250k. So we need just under 13k deposit. Combined we earn just over 50k a year after tax. I'm hoping once we actually get the place and are debt-free we can start overpaying on mortgage to make up for a 5% deposit.

Can I also just clarify this plan is better than renting out a house for a couple more years and continuing to save on deposit? I'm clueless when it comes to this.

lonibra

OP, think VERY carefully before dipping into your deposit to pay off debt. That is if you want to buy in the near future.

Having debt DOES NOT always affect borrowing. It depends on how large it is in relation to your income and how much flexibility you have on things like the term. For example with a 40k income, Halifax will lend me 190k over 30 years. And that doesn't change whether I have 7k of credit card debt or not.

You need to do the numbers for your actual requirements to see how much of an effect the debt has. Speak to an MB, they can give you a clear idea.

The only thing that IS certain is that if you don't have a 5% deposit, you can't get a normal mortgage.

namieco

I'm not touching my deposit to pay off debt- sorry if I wasn't clear. I will have a 5% deposit at minimum. I was just wondering whether closer to 10% is better, with debts, rather than 5% + debt free.

Emmia

Given you're pregnant, the bank will be considering the impact of reduced earnings during maternity leave (I'm presuming you're employed) and the costs of childcare after that finishes - also presuming you'll be returning to work, rather than being a stay at home parent.

Have you looked at those costs in terms of savings / debt repayments / mortgage affordability longer term?

namieco

Once we are both no longer throwing everything at a deposit and clearing debts, we'll be in a much better position. Yes I'm employed, and my company's got a fairly decent maternity scheme, so our combined income for that short period of time will still be enough to cover the estimated mortgage repayments, bills, food etc.