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

MaximumFish

Thanks for the responses. We undoubtedly overspend in places and I do need to sit down with full statements in front of me and go through it all. I tried to do this one while my wife got the kids to bed - who were already an hour and a half overdue - and you'd think it was Christmas Eve with the amount of noise they were making, so I ended up rushing it at the end. Mixed kids clubs with generic "entertainment" and so on.

I'd already been putting 400 a month aside and paying extra here and there when possible, so the 500 is on top of that - I should've made that clear. But the 500 is what we can comfortably pay every month without fail. The 400 all too often gets consumed by the unexpected expenses that crop up at the most inconvenient times. Birthdays and holidays are generally covered by this, for example.

@EssexHebridean not sure of the best way to respond to each of your points, but of the main ones: we have an EV, which is just coming up to 2 years old, so no fuel cost and no tax, and the service interval is 2 years so we've paid nothing on that yet (yes, definitely need to budget for it). Electricity is dirt cheap because we're on the Octopus fixed, which got extended another year by a system screw up. I think that ends in April so we're expecting a big rise then.

The two car loans are because one was used to buy out the PCP on our old car so that we could sell it privately, and then we used the funds from that to put the maximum deposit on the new one. It means we're paying that little bit less on interest overall.

Thanks again for the responses. Will definitely do another review when I can get some more time to get the fine toothed comb on it all.

Gavin83

Unless your credit cards are near maxed or you're right at the limit of your affordability having some credit card debt really won't make a difference to your mortgage offer. It's always good to have a healthy amount of savings in reserve which I'm gathering you don't currently have so I'd work on that first. It's said you should have 6 months of salary in savings but work on getting 3 months first.

After the savings your mortgage will be by far your most expensive debt and will likely cost more than you'll make in a savings account. Therefore I'd focus on paying off the mortgage as much as possible. That will also improve your mortgage offers as well. However if you can get a savings interest rate that's higher than your mortgage rate you'll be better off saving the money instead.

The last thing I'd do in your position is pay off 0% credit cards. Of course once that rate ends you may wish to pay it off to avoid a transfer fee but if you have savings then this option is available to you.

EssexHebridean

Ahhh - the Octopus fix that was marketed as a fix when actually it was a “Price Promise” so should have gone variable? Very handy indeed for you - and good that they’re honoured what the wording actually said in the introductory email - a lot of people have fallen foul of the wording the original ad for the tariff! Yes - you’re going to see a huge rise in April though - time to work out your annual use (in kWh) and calculate what the increase in DD needs to be as you are going to need that. Do you have any credit on the account to carry forward to help out for a bit?  It will also be worth you having a look at either a tariff like Octopus Go or even switching to Economy 7 if you have electric heating like night storage heaters. 

On the car, start budgeting for servicing, all consumables (so even things like screen wash and cleaning) the MOT test when it’s due for one…then when spending occurs there you have the money stashed in a “pot” ready.

Similarly, presents and holidays need saving for properly. There is nothing “unknown” here - if you’re going for a week in cornwall in June for example you know how much the accommodation will cost you, you can work out the travel cost, and you can set a budget for spending money. Then you need to divide that figure by 5 months in this example - now > holiday time, and make sure you put that amount away. Next year you’ll likely have a year to set the desired amount aside. Not budgeting for things like this is a recipe for reaching for credit cards to cover routine spending.

Your “spare” £400 needs to stop being swallowed up by “unexpected expenses that crop up at the most inconvenient times.” Not least as you mention birthdays and holiday in there - neither of which are in the least unexpected! The genuinely “unexpected” stuff - things like the washing machine packing up, the element going on your kettle, or a necessary school trip being sprung on you at a time when there is no money in the holiday account for example should be being covered by an emergency fund - aim to get £1,000 in there to start with, then keep building it. 

I think it’s fair to say that a lack of budgeting is really at the root of your problems here - and in fact in your case you are incredibly fortunate that your situation is remarkably easy to sort out too. Learn to budget, maybe use this thread to act as a “debt free diary” to chart your progress (you can request another move to the diaries board in due course if you decide to follow that path) and help you stay accountable. Budgeting is often at the root of debt problems - combined with a horrific expectation in this country (and elsewhere too, I’m sure!) about debt being “normal” - it takes some work to breakout of that mindset, but just imagine being able to move to your new home in 2 - 3 years with no consumer debt at all - just a mortgage, that you can immediately focus on overpaying? 

If you’re ready to start getting yourself in that position, you’re in the right place for plenty of help and support to get you there. 

enthusiasticsaver

I think you need to  get a much tighter grip  on your spending as undoubtedly that soa is incorrect or you would not have that amount of debt.  I would focus on clearing the cards as when you come to  remortgage deals that may affect affordability. Also there is  no guarantee that long 0% deals will be around forever so I would certainly want to see that cleared asap.  Then focus on mortgage overpayments.  

kimwp

Hiya! I echo the others above that you need a better understanding of what you are spending, as the difference between what you think you have spare and what your SOA says is quite large.

Just on case you aren't aware, your salary (or net adjusted salary) looks to be close to the point where your personal savings allowance (think that's the name) will reduce and you start having to pay back child benefit - worth reading up on it.

pinkteapot

MaximumFish said:

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...? 

I've never heard this before and we've had several mortgages and never had debt at the time. We have had credit cards throughout, but pay them off in full each month (we use them rather than debit cards because they give cashback). 

I thought it was just that mortgage lenders want to see a history of having credit but not getting into arrears? So someone who's never had a credit card, mobile phone contract etc. will struggle to get a mortgage because there's no history to prove they pay off debt when they have it.  

Agree with others that I'd get rid of the cards first, then the car loan. Yes, more equity in your house means you need a smaller mortgage on the next house, but the hit to monthly affordability from credit cards/loan payments would probably hurt you more than needing a bit of a bigger mortgage (that's assuming you're not pushing what you can borrow on current salaries). 

E.g. an extra £25k borrowed on a 25-year mortgage at 5% costs £146 per month. 

On the SOA, as commented, there's lots of things that will cost you a fairly predictable amount each year (e.g. car running costs) but you're not budgeting for.

Our monthly budget has all our monthly bills listed, plus amounts that go into various savings accounts for things we pay annually (or less often):

• holidays
• car service/MOT/tax/insurance/repairs
• house insurance
• OH's golf membership
• new cars (we save up over 8-10 years for the next car)
• long-term savings (an amount we've decided we'll save rather than spend each month)

So, we get paid then our bills AND payments to savings pots go out, then what's left is our spends (food, petrol and general everyday spending), for which we have a fixed monthly amount. If there's anything left at the end of the month, that goes into 'general long-term savings' as an extra payment.

This all sounds really sad, but I've been running my accounts like this since I joined MSE in 2003, when I had built up credit card debt after leaving home. I learnt to really get control of my monthly budget on the DFW board, and I've done it ever since. I'm now with OH and our budget's healthy enough that I probably don't really need to run it this closely any more, but I like to.