Best tactic to reduce debt and climb property ladder

dylmoney

Hi all,

My partner and I have been on a continuous improvement of our debt situation for the past 5-6 years, but now we're in a bit of a quandary as we're looking to sell our home and move to a much higher valued property next year.

We currently have debts of about 23k, about 15k mine over 2 loans and 7k is my partner's in one. My payments total roughly 450 a month, my partner's 250.
We also have an Argos card (my partner's) which we plan to clear the balance of by the end of Feb as the balance is approx. 300.
I have a credit plan with a balance of just over 1k - payments at 60 a month for 2 years.

Everything is on course to be cleared by the end of 2024 with the exception of one of my loans which will be cleared by 2026.

We both have credit cards - balance cleared on all of them.

Finally, the mortgage -- 60k left on a property worth 81k when we bought it, and at maximum 95k if we were lucky to sell at the top of the market value.
We pay 413 a month, with 14y 6mo left, and have a 10% overpayment allowance per year.

Income-wise I am on 25k a year, this is due to rise in April but since I don't know how much by (although I can guess) I'm not looking to base any calculations on speculation.
My partner is on 21,500.

We comfortably afford all of our outgoings with some spare per month - we don't have savings at the moment.
Because of this lack of savings our deposit on a new property would be mainly or solely equity.



We recently applied for an Agreement in Principle with our current mortgage lender (who coincidentally provide one of mine and my partner's loan) and were offered appreciably less than we were quoted was possible on their mortgage calculator.

They said this was due to our current loans and credit plan and paying off even the credit plan would raise what they would lend us by 10k straight away.
They also said that although this is true of them, that other mortgage lenders may offer us exactly what we wanted, or we could try consolidation.

Consolidation has proven a no-go, no lenders would give us 23k unsecured.

My plan at the moment is a hybrid of snowballing, avalanche and building equity.

As I said before the goal is to clear the Argos card this month or before the end of Feb.
I plan to follow this up by clearing the credit plan ASAP.
Then, finally, to tackle the loans.

So the questions I have...

First question - is it worth overpaying on our mortgage as much as humanly possible, instead of paying off the loans early, to build more equity and therefore increase our deposit plus access to a larger lump sum?

Second question - due to being recommended consolidation by the mortgage adviser, are longer-term debts with lower repayments seen more favourably by mortgage lenders than short-term debts with higher repayments (regardless of the amount)?

Asking mainly due to our lack of savings we've had to resort to loans for lump sums in emergencies previously, and this could determine which of our loans I choose to pay off first.
I've always settled on paying more per month over a shorter term to decrease the amount of interest I pay and for how long, but I'd be interested to know if this would hurt me in future.


TL;DR

Best approach to build equity, for a deposit on a new house, while reducing debt as much as possible?

Mortgage
60k over 14y 6mo -- 413pm (1.95%)

Debts
Me:
10k over 33mo -- 340pm (7.9%)
5k over 53mo -- 110pm (10.5%)
1k over 24mo -- 60pm (24.9%)

Partner:
7k over 30mo -- 250pm (3.8%)
350 before March (BNPL)

Income
Me:
25k pa

Partner:
21.5k pa

Savings
Nil

Cheers everyone!

RAS

Pay off the most expensive debt first.

And complete your Statement of Affairs SOA Calculator (lemonfool.co.uk) 

You need to understand how you got in this situation.

"We comfortably afford all of our outgoings with some spare per month - we don't have savings at the moment."

If that were correct, you wouldn't have debt that exceeds your equity and is more than half your take home pay.

kimwp

Is it wise to be taking on a larger mortgage when you are only just breaking even with the debts you have?

kimwp

When I bought my house, I made sure I had savings to cover my outgoings for a year. I highly recommend this strategy. It feels like you are teetering on the edge of a debt spiral and it would only take one thing to push you over it. You not only don't have savings, but you have debts, which drops your safety net even further. Buying a more expensive house is the equivalent off climbing higher up the cliff - it's a nicer view, but it's a more painful fall.

ratrace

Also buying a bigger house will mean more expense to run etc... where people go wrong when they buy a house is they go on a shoping spree to put they own stamp on it, please dont fall into that trap and end up in a worse place than you are now

i would personally take the new house of the table for a good while yet untill all the debt was paid off, then once thats done then look into a bigger house you want the new house to be a blessing not a curse

sorry for the frank response but sometimes we ourselves find it hard to see the wood from the trees

dylmoney

RAS said:

Pay off the most expensive debt first.

And complete your Statement of Affairs SOA Calculator (lemonfool.co.uk) 

You need to understand how you got in this situation.

"We comfortably afford all of our outgoings with some spare per month - we don't have savings at the moment."

If that were correct, you wouldn't have debt that exceeds your equity and is more than half your take home pay.

So I've only just started earning 25k a year, this would be my third month on those wages, before that I was on 18k.

Background on that is I took a significant pay cut for 3 years to re-train and set myself up for a long-term more highly paid career which meant we were paycheck to paycheck for a while and weren't able to save.

In those three years we had emergency medical issues with our dogs, insurance refused to pay out for our most recent one hence my 5k loan. (We used credit cards for our other one - which are cleared). Before that our equity exceeded our debt (albeit only just).

I keep a spreadsheet monthly budget, which has helped us reduce our debt over the years and is why I haven't done the SOA, but if needed I can spend some time filling it out.

kimwp said:

Is it wise to be taking on a larger mortgage when you are only just breaking even with the debts you have?

At the moment it wouldn't be, moving up the ladder is partly contingent on pay increases and resolving some debt, so we're looking to do it in a year or so.

Thrugelmir

dylmoney said:

In those three years we had emergency medical issues with our dogs, insurance refused to pay out for our most recent one hence my 5k loan. (We used credit cards for our other one - which are cleared). Before that our equity exceeded our debt (albeit only just).

Without savings. Any financial emergency or distress will result in yet more debt. As has been said earlier. Break the cycle. Overpay the highest interest debt first.  Review your budget and cut the waste spend. A short period of hard graft will pay dividends. 

enjoyyourshoes

As first commentator said, identify your debts by highest interest rate first and going down to lowest. Pay highest first then next etc.
Identify your joint goal in priority order. (id be challenging why move up property ladder as moving with estate agents, conveying and Stamp Duty will be dead money.
Again as first commentator said, I think you are not really seeing your debt position as  reality by stating 'we comfortably pay for our outgoings'.
You are or have been and have a tendency to spend more than you earn (creating debt) The banks have told you this when applying for AIP. Both identify why you overspend and have a joint strategy to resolve this problem.
Maybe taking on additional responsibilities may have caused this (dog) or change in priority (career change) but you have to be rational when making these decisions and maybe you were not as detailed as you could have been (identifying cost and consequences of each decision) 
Good luck 

dylmoney

The main reason we're looking to move up the property ladder is we live in a city and want to move to a quieter area. We live in a 3 bed semi at the moment and we're actually looking to downsize.

I've done the SOA to the best of my ability. We pay some things annually, in full, such as car insurance. Life assurance comes from both our places of work and we both have permanent WFH jobs.

Statement of Affairs & Personal Balance Sheet

Summary

Monthly Budget Summary	Amount(£)
Total monthly income	3,259.03
Monthly expenses (incl. HP & secured loans)	1,986.66
Available for debt repayments	1,272.37
UNsecured debt repayments	782.93
Amount left after debt repayments	489.44

Personal Balance Sheet Summary	Amount(£)
Total Assets (things you own)	83,500
Total Secured & HP Debt	-62,418.6
Total Unsecured Debt	-23,463.45
Net Assets	-2,382.05

Household Information

Number of adults in household	2
Number of children in household	0
Number of cars owned	1

Income, Expense, Debt & Asset Details

Income	Amount(£)
Monthly income after tax	1602.99
Partners monthly income	1421.24
Benefits	234.8
Other income	0
Total monthly income	3259.03

Expenses	Amount(£)
Mortgage	412
Secured/HP loan payments	0
Rent	0
Management charge (leasehold property)	0
Council tax	118
Electricity	49.44
Gas	49.44
Oil	0
Water Rates	39.39
Telephone (land line)	0
Mobile phone	110.09
TV Licence	13.37
Satellite/Cable TV	25
Internet services	25
Groceries etc.	400
Clothing	15
Petrol/diesel	60
Road tax	11.37
Car Insurance	26.27
Car maintenance (including MOT)	12.5
Car Parking	0
Other travel	0
Childcare/nursery	0
Other child related expenses	0
Medical (prescriptions, dentists, opticians etc.)	0
Pet Insurance/Vet bills	124.49
Buildings Insurance	5
Contents Insurance	11.53
Life Assurance	0
Other Insurance	4.49
Presents (birthday, christmas etc.)	50
Haircuts	15
Entertainment	21.98
Holiday	234.8
Emergency Fund	0
ECU	100
DSC	12.5
Second Nature	40
Total monthly expenses	1986.66

Secured & HP Debt Description	Debt(£)	Monthly(£)	APR(%)
Mortgage	62418.6	(412)	1.95
Secured & HP Debt totals	62418.6	-	-

Unsecured Debt Description	Debt(£)	Monthly(£)	APR(%)
LLD	10283	346.6	7.9
LLK	7253	268.4	3.8
ALD	4613.53	107.9	10.57
Argos	300	0	0
CFD	1013.92	60.03	24.9
Unsecured Debt totals	23463.45	782.93	-

Asset Description	Value (£)
Cash	0
House Value (Gross)	81000
Shares and bonds	0
Car(s)	2500
Other assets (e.g. endowments, jewellery etc)	0
Total Assets	83500

Comments on the results

You have sufficient monthly income to meet your expenses and your minimum monthly debt repayments with £489.44 left over. You can use this to pay off your debts more quickly or to build/top-up an emergency fund. Whatever your results show, it always pays to seek advice or comments from others. 

kimwp

dylmoney said:

RAS said:

Pay off the most expensive debt first.

And complete your Statement of Affairs SOA Calculator (lemonfool.co.uk) 

You need to understand how you got in this situation.

"We comfortably afford all of our outgoings with some spare per month - we don't have savings at the moment."

If that were correct, you wouldn't have debt that exceeds your equity and is more than half your take home pay.

So I've only just started earning 25k a year, this would be my third month on those wages, before that I was on 18k.

Background on that is I took a significant pay cut for 3 years to re-train and set myself up for a long-term more highly paid career which meant we were paycheck to paycheck for a while and weren't able to save.

In those three years we had emergency medical issues with our dogs, insurance refused to pay out for our most recent one hence my 5k loan. (We used credit cards for our other one - which are cleared). Before that our equity exceeded our debt (albeit only just).

I keep a spreadsheet monthly budget, which has helped us reduce our debt over the years and is why I haven't done the SOA, but if needed I can spend some time filling it out.

kimwp said:

Is it wise to be taking on a larger mortgage when you are only just breaking even with the debts you have?

At the moment it wouldn't be, moving up the ladder is partly contingent on pay increases and resolving some debt, so we're looking to do it in a year or so.

Thank you for explaining. In that case (noting I am not a mortgage advisor!), The lenders will (more or less) consider what mortgage debt they think is reasonable for your income, job stability and financial payment history etc and deduct the debts you owe off that. So increasing your equity and reducing your debt will mean the same thing in terms of house price that you will be able to afford. 
As your debts are (I'm assuming), at a higher interest rate than your mortgage, it therefore would to me make more sense to pay off the debts. Although, I'm not sure how LTV would affect it, as a lower mortgage would mean a better LTV, so maybe a better rate??!

I know I've said it before, but I would really recommend not just getting rid of your debts, but building up a minimum three month fund before you think of moving.

kimwp

dylmoney said:

The main reason we're looking to move up the property ladder is we live in a city and want to move to a quieter area. We live in a 3 bed semi at the moment and we're actually looking to downsize.

I've done the SOA to the best of my ability. We pay some things annually, in full, such as car insurance. Life assurance comes from both our places of work and we both have permanent WFH jobs.

Statement of Affairs & Personal Balance Sheet

Summary

Monthly Budget Summary	Amount(£)
Total monthly income	3,259.03
Monthly expenses (incl. HP & secured loans)	1,986.66
Available for debt repayments	1,272.37
UNsecured debt repayments	782.93
Amount left after debt repayments	489.44

Personal Balance Sheet Summary	Amount(£)
Total Assets (things you own)	83,500
Total Secured & HP Debt	-62,418.6
Total Unsecured Debt	-23,463.45
Net Assets	-2,382.05

Household Information

Number of adults in household	2
Number of children in household	0
Number of cars owned	1

Income, Expense, Debt & Asset Details

Income	Amount(£)
Monthly income after tax	1602.99
Partners monthly income	1421.24
Benefits	234.8
Other income	0
Total monthly income	3259.03

Expenses	Amount(£)
Mortgage	412
Secured/HP loan payments	0
Rent	0
Management charge (leasehold property)	0
Council tax	118
Electricity	49.44
Gas	49.44
Oil	0
Water Rates	39.39
Telephone (land line)	0
Mobile phone	110.09
TV Licence	13.37
Satellite/Cable TV	25
Internet services	25
Groceries etc.	400
Clothing	15
Petrol/diesel	60
Road tax	11.37
Car Insurance	26.27
Car maintenance (including MOT)	12.5
Car Parking	0
Other travel	0
Childcare/nursery	0
Other child related expenses	0
Medical (prescriptions, dentists, opticians etc.)	0
Pet Insurance/Vet bills	124.49
Buildings Insurance	5
Contents Insurance	11.53
Life Assurance	0
Other Insurance	4.49
Presents (birthday, christmas etc.)	50
Haircuts	15
Entertainment	21.98
Holiday	234.8
Emergency Fund	0
ECU	100
DSC	12.5
Second Nature	40
Total monthly expenses	1986.66

Secured & HP Debt Description	Debt(£)	Monthly(£)	APR(%)
Mortgage	62418.6	(412)	1.95
Secured & HP Debt totals	62418.6	-	-

Unsecured Debt Description	Debt(£)	Monthly(£)	APR(%)
LLD	10283	346.6	7.9
LLK	7253	268.4	3.8
ALD	4613.53	107.9	10.57
Argos	300	0	0
CFD	1013.92	60.03	24.9
Unsecured Debt totals	23463.45	782.93	-

Asset Description	Value (£)
Cash	0
House Value (Gross)	81000
Shares and bonds	0
Car(s)	2500
Other assets (e.g. endowments, jewellery etc)	0
Total Assets	83500

Comments on the results

You have sufficient monthly income to meet your expenses and your minimum monthly debt repayments with £489.44 left over. You can use this to pay off your debts more quickly or to build/top-up an emergency fund. Whatever your results show, it always pays to seek advice or comments from others. 

Your SOA looks reasonably complete and you can update it over the next year as well so it's as accurate as possible. There are definitely some areas you can cut back on.

Crunching some numbers (from memory of what you've said, so adjust if I have the wrong):
Your salary was down at 18k for three years. Your debt accumulated over that time was £23.5kish, which is £7.8k per year. If your wage has gone from £18k to £25k, that's an additional £4.6k take-home pay. This means that your current pay would not have been enough to cover your expenses during that three year period, which means you are at high risk of your current pay not being able to pay your current expenses. (Put another way, you needed an additional £7.8k a year when you were on £18k and you've only gained an additional £4.6k by your salary increase to £25k)
I get that some of these were "one offs" like pet expenses, but pets only get more expensive - it's reasonable to assume they will cost the same again.