Clear debts for new mortgage - but in what order

paulsvan

Up until 2020 I was doing pretty well with a 60k mortgage and no debts. But Covid and a marriage breakdown threw me into a spiral of debt mid 2020 and I find myself with some accumulated problems.

Last year I sadly lost my Grandmother (thankfully not to Covid, but old age and in her home with family). She left me a share of her estate.

My intention is to clear my debts with the inheritance and get my life back on track. I've been in my job 3 year and earn around 2.5k a month but these debts are dragging me down and I often have nothing after bills and payments mid month.

Now with a new partner and son we are looking to get a new mortgage within a year. My partner goes back to work next month, I am about to get a promotion plus bonus and I want to make the money I have from the inheritance work to assist getting the mortgage with minimum hassle.

From what I read getting the credit cards and overdraft sorted might be the priorities but I would welcome any advice. I am trying to find a balance between getting the debt down and sorting a mortgage and having some money as a buffer to get us through these difficult times.

fatbelly

If you are thinking of a mortgage, then you want your credit history to be as clean as possible to get the best deals.

It will be worth seeing what is recorded with all three CRAs - you do not have to pay for this. 

All three all have a free ongoing subscription, under different names:

 

http://www.moneysavingexpert.com/creditclub

https://www.clearscore.com/

https://www.creditkarma.co.uk/

If you have a default showing on any creditor, then that is bad and good news. The default stays for 6 years, regardless of what you do, but the owner of the debt will be open to a settlement deal that could save you a lot of money

For an entry with no default showing then you just pay it off, it gets marked settled. You could continue to make the monthly payment but as the amount of outstanding debt will be a factor in a mortgage application and in practice the interest charged will be far greater than you can get from investing your inheritance. It makes sense just to clear those.

The other main things you can do to improve your file are to make sure you are on the electoral roll and have one credit card that you use for shopping and pay off in full each month.

Andyjflet

HI, I chose to do this the Dave Ramsey way, smallest to largest, mentally it really helps with small wins, less number of debts, this is the snowball method.
However if you have any very high APR debts then consider switching these to 0% Credit card or clearing first. 

paulsvan

I have debts of around 37k:
Loans: 29k (18k car finance)
Credit Cards: 6k
Other Credit : 2k

I'm probably going to look to clear 10k of my partners debts as well.

I expect my inheritance to be around 50k after costs and legal fees.

I was thinking I would clear the high interest credit cards and minor 'other credit' first to get the worries and niggles gone for good. Then look at low impact loans and the car finance. Might swap to a lower cost car to bring that down too.

Does this seem like a sensible approach?

fatbelly

Yes that does seem sensible. Get rid of any high interest debt as a priority.

Have a look at your options with the car. To be borrowing 18k against a depreciating asset is not very mse. You could probably do a voluntary termination on that and buy something with cash.

paulsvan

Have a look at your options with the car. To be borrowing 18k against a depreciating asset is not very mse. You could probably do a voluntary termination on that and buy something with cash.

Termination is an option but I might just trade it against something smaller and less expensive on tax and insurance than a pickup truck as my needs have changed and its mainly just me on a commute now.