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

K_S

namieco said:

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.

@namieco Depends on the numbers and your credit history.

Very very generally speaking (and purely from the point of view of maximising your mortgage options), unless your income is very low, 7k debt and 90% LTV is likely to stand you in better stead than 95% LTV with no debt.

namieco

@K_S Combined income is about 50-60k after tax. So you would think we'd be better off trying for a 10% deposit, and keeping the debt pretty much where it is?

Thrugelmir

namieco said:

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

Then you need to get a handle on everything. As you are simply throwing money down the drain.  Time to draw up a proper plan as to the best way of clearing them.  

steampowered

Having debt will reduce the amount you can borrow. This is because the bank will see it as committed expenditure, which reduces the amount you can afford on the mortgage.

Remember that to get a mortgage you need at least a 5% deposit AND the mortgage must be affordable based on your salary, minus committed expenditure.

You might want to have a look at the more detailed mortgage calculators to see how retaining this debt impacts the size of the mortgage you can get. Try https://www.halifax-intermediaries.co.uk/tools_and_calculators/mortgage_affordability_calculator/default.aspx. 

You say that you think you are paying "average" interest. The average credit card interest rate in the UK is about 21%. 21% of £7,000 is £1,470. So that might be £1,470 you are throwing straight down the drain each year. If that's what you are paying, you might as well take out £50 notes from a cash machine and set fire to them - same thing really.

Check whether you can reduce the interest you are paying - e.g. by doing a balance transfer onto a cheaper card.

grumiofoundation

namieco said:

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.

Interest on overdraft could well be 40%. As posted above credit card interest could be 20%

Even if you can't dip into deposit to pay off debt. Check the interest rates on debt ASAP, look into transferring to 0% card, look at where savings are allocated.
 
No point having 1k in a 1% savings account and dipping into 40% overdraft each month. 

jazzyja

You need to work this out carefully. This was my original worry when I started saving. What i did initially was pay off the high interest debts ...about 4k in total. I knew I'd have to wait at least 12 months before I could buy anyway due to things on my credit file....so in those 12 months I paid the high interest off right away and then started saving for deposit plus the other debts. This would work out I would have exactly 10% deposit and pay off all my high interest debt. Personally I couldn't save plus have a credit card at 39% Apr....just isnt logical. When I applied for my mortgage i still had 6k worth of debt but this is car finance low Apr so I wasn't overly concerned about that still being left and I was still OK to obtain a mortgage. You need to know your interest rates, and get rid of the high ones before you save anymore. Also you've to be squeaky clean for 5% deposit....they may not accept that level of debt 

namieco

So my choices seem to be: 

1. Pay off all debts and save for a 5% deposit
2. Keep debts as they are and try to go for a 10% deposit
3. Rent a new house instead of buying and buy after we have 10% deposit and debt free

Looks like the winner is number 1?

RAS

I'd suggest that you check the interest rate on the overdrafts, as that is likely to be horrendous. And anything else over 20% interest rate.

grumiofoundation

namieco said:

So my choices seem to be: 

1. Pay off all debts and save for a 5% deposit
2. Keep debts as they are and try to go for a 10% deposit
3. Rent a new house instead of buying and buy after we have 10% deposit and debt free

Looks like the winner is number 1?

4. Buy a house with current 5% deposit

So is this not an option then? I thought that was what you were hoping to do (based on your opening post)? Have you spoken to a mortgage broker about your options?


Depending on how much your deposit is currently and how much your are looking to borrow maybe debt won't be an issue. But another thing to consider is if you saved for longer would you be able to buy a bigger house (if this is something you would want/need)?

namieco

grumiofoundation Option 1 is option 4. I almost have the 5% deposit, but not quite. It will take a few more months.

Our debt is 7k combined, we are looking at a 250k house.

I've just been approved for a 0% balance transfer card to stop paying interest on my credit card- didn't know this was even a thing! Thanks for advice.