How to prioritise debt payments with a view to getting a mortgage for new house?

MaximumFish

I really couldn't decide on the best place to post this, but as the ultimate goal is a house purchase it seemed best placed here. Mods, feel free to move if needed.

(Sorry for the lack of pound symbols - my laptop has a US keyboard.)

We're a family looking to upgrade our 3 bed terrace to something more spacious before our eldest goes to secondary school, which gives us 2 to 2.5 years to get into the best position possible. I've just had a fairly decent payrise, which should enable to us to pay roughly 500 in overpayments every month, so we're trying to decide what to prioritise paying off and in what order. Right now we have:

- Approx 10K on credit cards. Over the years we've managed to accrue 9 cards between us for shuffling between 0% deals, and all but two of them are empty right now. One of them has its 0% expiring in November and the other in September 2024, and we're currently paying just under 300 a month on minimum payments. We have around 55K of total credit on these.

- A fixed rate loan that we used for a car purchase. I'm not sure how much value is left on it, but we're paying 270/month at 3% interest and it's got 3 years left.

- The mortgage on our current house. Around 100K left on this, paying 666 a month, fixed for another 2 years which is either at 1.9 or 2.9%.

My gut says to pay off the credit cards first because they've been hovering over our heads for a good 20 years, and getting them both empty before the offers expire seems like a good play, but it also feels like a waste while they're at 0% and we're paying interest on other things. On top of that, the MSE guide that seems to say having ~25% of your available credit in use is a good thing for mortgage vendors to see...? Meanwhile my wife reckons making overpayments on the mortgage in order to maximise the equity in our current house is the best play. Or maybe paying the loan off early is the way to go because it's the highest interest.

Sooo, any ideas? What's the smartest move in this situation?

Cheers all. Looking forward to hearing your thoughts!

Martico

If it was me, I'd worry about the CCs, as you can't be guaranteed another 0% deal, and you risk those rates rising sharply. Plus, they'll continue to hang around your neck.
If you pay a total of 555 a month to the two cards (weighted first towards this year's one) then both will be at 0 in 18 months.
That gives you some scope to pull down the other debts a bit. Or to put some into savings if you don't already have a buffer.
Check if there are penalties for overpaying on the car loan and then decide on the split.
But that's me. You may eke a few quid more from doing it another way

Bluebell1000

Monthly payments to credit card debt will count against your affordability for a new mortgage so I'd prioritise that first. The car loan will make a difference to affordability too, but credit cards seem to end sooner... However if they are 0%, instead of upping monthly payments, you could put money aside to repay them at the end of the interest free period, as you'll gain a bit of interest by doing it.

EssexHebridean

First up, I’d suggest requestion a move to the Debt Free Wannabe board for the thread - we’re used to dealing with this sort of question over there.

you also need to put together your SOA - statement of affairs- there is a link in my signature to the calculator we recommend for this. Once filled in (and you need to make it as complete as possible, you might find it helpful to go back over a years bank and card statements to try to make sure you don’t miss anything) use the “format for MSE” option and post into your thread (copy & paste) and we’ll be able to take a look and see if we can spot any savings that you might have missed which can help you get the debt cleared faster.

At a quick glance, I’d suggest you want to get some of the older empty cards closed off - I’m guessing that at the moment your total available credit figure would be pretty high? 

It’s great that the card debt is on 0% - that means that everything you are paying is going to clearing the capital balance of course. 

Are you still using credit at all? And how does your credit file look overall - do you have any missed payments, arrangement to pay markers etc? 

You’ve got time to make a significant difference to your position - so get that SOA done, request the thread move (you can do it via the report button) and let’s see how looks best to approach things, and what tweaks we can make to your budget to hopefully get even more cleared! 

MaximumFish

Thanks for the comments so far, they seem to gel with what I was thinking, and a very good point about not knowing whether there will be offers on when these expire.

@e@EssexHebridean thanks, I'll request a move and have a crack at the SoA.

MaximumFish

Here we go. Some of it is estimates based on eg, 3 months of transactions, and some of it is outright educated guessing - such as "entertainment" where I've tried to factor in the odd trip to the pub for me, as well as the various kids clubs etc. I tried to overestimate as much as possible fwiw. Also tricky to include non-annual big expenses like car tires, which has just cost us almost 800 quid for a full set.

@EssexHebridean In answer to your questions that I missed: Yes, total available credit is around 55K. And yes, we use an Amex card to pay literally anywhere that accepts it in order to get the 1% cashback, and then pay it off in full each month. That's not included in the 9 cards and 55K credit already mentioned because it's strictly for normal spending. We don't spend on any of the other cards.

As far as our credit file goes, it's tip top. I don't think either of us have ever missed a payment on anything, and certainly not in the last 20 years.

Edit: Er, unsure why the formatting hasn't worked. It's a straight copy/paste from the SOA site.

[font=courier new][b]Statement of Affairs and Personal Balance Sheet[/b][b]

Household Information[/b]
Number of adults in household........... 2
Number of children in household......... 2
Number of cars owned.................... 1[b]

Monthly Income Details[/b]
Monthly income after tax................ 3101
Partners monthly income after tax....... 1713
Benefits................................ 145
Other income............................ 0[b]
Total monthly income.................... 4959[/b][b]

Monthly Expense Details[/b]
Mortgage................................ 666
Secured/HP loan repayments.............. 0
Rent.................................... 0
Management charge (leasehold property).. 0
Council tax............................. 192
Electricity............................. 100
Gas..................................... 0
Oil..................................... 0
Water rates............................. 24
Telephone (land line)................... 0
Mobile phone............................ 24
TV Licence.............................. 12.47
Satellite/Cable TV...................... 0
Internet Services....................... 59.99
Groceries etc. ......................... 600
Clothing................................ 50
Petrol/diesel........................... 0
Road tax................................ 0
Car Insurance........................... 27
Car maintenance (including MOT)......... 0
Car parking............................. 0
Other travel............................ 0
Childcare/nursery....................... 0
Other child related expenses............ 0
Medical (prescriptions, dentist etc).... 0
Pet insurance/vet bills................. 28.77
Buildings insurance..................... 13
Contents insurance...................... 5.58
Life assurance ......................... 37.45
Other insurance......................... 6.62
Presents (birthday, christmas etc)...... 100
Haircuts................................ 5
Entertainment........................... 700
Holiday................................. 100
Emergency fund.......................... 0[b]
Total monthly expenses.................. 2751.88[/b]
[b]

Assets[/b]
Cash.................................... 0
House value (Gross)..................... 255000
Shares and bonds........................ 0
Car(s).................................. 45000
Other assets............................ 0[b]
Total Assets............................ 300000[/b]
[b]

Secured & HP Debts[/b]
Description....................Debt......Monthly...APR
Mortgage...................... 111000...(666)......1.67[b]
Total secured & HP debts...... 111000....-.........-   [/b]

[b]Unsecured Debts[/b]
Description....................Debt......Monthly...APR
Car loan.......................6092......273.......2.9
Car PCP........................23613.....293.......4
Card 1.........................6984......209.......0
Card 2.........................3042......30.42.....0[b]
Total unsecured debts..........39731.....805.42....-  [/b]

[b]
Monthly Budget Summary[/b]
Total monthly income.................... 4,959
Expenses (including HP & secured debts). 2,751.88
Available for debt repayments........... 2,207.12
Monthly UNsecured debt repayments....... 805.42[b]
Amount left after debt repayments....... 1,401.7[/b]

[b]Personal Balance Sheet Summary[/b]
Total assets (things you own)........... 300,000
Total HP & Secured debt................. -111,000
Total Unsecured debt.................... -39,731[b]
Net Assets.............................. 149,269[/b]

[i]Created using the SOA calculator at www.LemonFool.co.uk.
Reproduced on Moneysavingexpert with permission, using Firefox browser.[/i][/font]

penners324

You are correct. Clearing those credit cards has to be the priority. In fact it'd be best *in my opinion) to pay as much of those credit cards as soon as possible.

Maybe close some of those credit cards as well, that much potential credit isn't always a good thing either .

Ignore the suggestion about having 25% of credit card debt. It's nonsense.

The best way to run a credit card is to pay it off in full every month after the statement date.

chanz4

food shopping and entertainment think are whats killing it as your income is decent

EssexHebridean

MaximumFish said:

[font=courier new][b]Statement of Affairs and Personal Balance Sheet[/b][b]

Household Information[/b]
Number of adults in household........... 2
Number of children in household......... 2
Number of cars owned.................... 1[b]

Monthly Income Details[/b]
Monthly income after tax................ 3101
Partners monthly income after tax....... 1713
Benefits................................ 145
Other income............................ 0[b]
Total monthly income.................... 4959[/b][b]

Monthly Expense Details[/b]
Mortgage................................ 666
Secured/HP loan repayments.............. 0
Rent.................................... 0
Management charge (leasehold property).. 0
Council tax............................. 192
Electricity............................. 100 Are you certain this is covering what you’re using? It’s slightly lower than my monthly cost - I’m in a 2 bed flat so I’d expect most people in houses to be paying more. Either way, remember that the EBSS payments finish soon, and that we will see an increase in April,that you need to budget for. 
Gas..................................... 0 No gas? 
Oil..................................... 0
Water rates............................. 24 Metered? That’s pretty good going though.
Telephone (land line)................... 0
Mobile phone............................ 24
TV Licence.............................. 12.47 You might want to check this - most people seem to be paying £13.25 a month now. 
Satellite/Cable TV...................... 0
Internet Services....................... 59.99 If this is just internet it’s quite high. It might have TV bundled in with it though?
Groceries etc. ......................... 600 You could definitely cut this back by £100 a month, and with some work probably a bit more too. 
Clothing................................ 50
Petrol/diesel........................... 0 How come nothing here?
Road tax................................ 0 Zero rated car?
Car Insurance........................... 27
Car maintenance (including MOT)......... 0 You have to start budgeting here - you’ve just had a big bill for tyres - so you need to use your mileage to estimate now when those will next need replacing, also things like servicing costs etc, and budget monthly for that. 
Car parking............................. 0 
Other travel............................ 0
Childcare/nursery....................... 0
Other child related expenses............ 0 You need to start budgeting for the known costs like clubs and activities.
Medical (prescriptions, dentist etc).... 0
Pet insurance/vet bills................. 28.77
Buildings insurance..................... 13
Contents insurance...................... 5.58
Life assurance ......................... 37.45
Other insurance......................... 6.62
Presents (birthday, christmas etc)...... 100 Where are you saving this as you’re showing nothing in cash assets?
Haircuts................................ 5
Entertainment........................... 700 This is huge?! I get that you’re estimating, but seriously, that would be a big spend for a family without debt.
Holiday................................. 100 Where are you saving this as you’re showing nothing in cash assets?
Emergency fund.......................... 0 You need to start budgeting this - it’s having this that saves you ending up teaching for credit when things go wrong.  [b]
Total monthly expenses.................. 2751.88[/b]
[b]

Assets[/b]
Cash.................................... 0
House value (Gross)..................... 255000
Shares and bonds........................ 0
Car(s).................................. 45000
Other assets............................ 0[b]
Total Assets............................ 300000[/b]
[b]

Secured & HP Debts[/b]
Description....................Debt......Monthly...APR
Mortgage...................... 111000...(666)......1.67[b]
Total secured & HP debts...... 111000....-.........-   [/b]

[b]Unsecured Debts[/b]
Description....................Debt......Monthly...APR
Car loan.......................6092......273.......2.9 You only show one car, so why two lots of payments here?
Car PCP........................23613.....293.......4
Card 1.........................6984......209.......0
Card 2.........................3042......30.42.....0[b]
Total unsecured debts..........39731.....805.42....-  [/b]

[b]
Monthly Budget Summary[/b]
Total monthly income.................... 4,959
Expenses (including HP & secured debts). 2,751.88
Available for debt repayments........... 2,207.12
Monthly UNsecured debt repayments....... 805.42[b]
Amount left after debt repayments....... 1,401.7[/b]

[b]Personal Balance Sheet Summary[/b]
Total assets (things you own)........... 300,000
Total HP & Secured debt................. -111,000
Total Unsecured debt.................... -39,731[b]
Net Assets.............................. 149,269[/b]

[i]Created using the SOA calculator at www.LemonFool.co.uk.
Reproduced on Moneysavingexpert with permission, using Firefox browser.[/i][/font]

Ok - usual comments in bold above. 

A few things stand out - the first is that this isn’t actually what you spend each month is it? If it was, then you don’t have an issue - because you have an annual surplus showing of nearly £17k, plus probably another £5k of savings possible over a year too. That means you can have all your debt, including the car loans cleared in two years - job done, problem solved… 

So - I think you need to go back over your spending and redo this with actual, factual spends. If I had to guess, I’d say you’re spending more than you think in a good few areas - possibly including those that already look high - groceries and entertainment. 

You need to start budgeting thoroughly - and accounting for the various areas of spending too - you mentioned having recently started a new job, so I’m not sure how up in the air your finances are while you adjust to that. How much surplus do YOU think you have left at the end of the month though? I’d also suggest starting to use a spending diary to note what you do actually spend - that will then give you a better grasp of what is going where. 

The good news is that if you can end up with £1k clear “spare” each month, plus maybe make a few added savings here and there, you can have the lower balance card clear inside 3 months, then start throwing everything spare at the higher balance one. 

Take a breath, go back over everything, start tracking spends, and have a second go at the SOA with more fact and less guesswork. You’re in a good place financially  - and a little bit of organisation can see you debt free in a relatively short space of time.

one other thing to consider - does the car deal come with a balloon payment or once it’s cleared will the car be yours? If there is a final payment to be made you need to start budgeting for the amount needed for that now too so you have it ready. 

theoretica

"Amount left after debt repayments....... 1,401"

but you think you can increase your debt repayments by only £500 - to me that indicates that you have *a lot* of money walking out of your accounts in ways which are not accounted for in the SOA.  Maybe you know exactly where it has been going (eg a home extension) but if not you would benefit a lot from tracking it down and working out where it has been going and making it go where you choose!

ellenvan

Best bet is record all spends Feb on in a notebook - even the little spends of a few quid mount up.
Entertainment - maybe separate out kids etc.  - then have an allowance each and try to budget for a few low spend entertainments.