Loans or credit cards - what debt is best for mortgage affordability?

Herzlos

Obviously debt free is best, and we're hoping to be mostly there by next summer but before that we're considering moving earlier if the right house appears.

Combined income is about £65k, and we have the following debts:

Argos buy now pay later: £1.5k @ 0%.
Credit card: £9k @ 0%.
Loan: £8k @3.9%, £200/month.

Car finance: £12k @ 3.9%, £250/month.

We have £9k in savings (deposit is going to come from equity in existing house) with a view of clearing the credit card and Argos BNPL before the 0% deals expire, but I was considering bringing that forward so we'd have less debt (and no savings).

Am I right in assuming that credit card debt is going to be viewed the least favorably, and by clearing that first it'll give us the higher total borrowing amount?
That clearing the £9k of credit card debt will increase our maximum loan amount by more than £9k?

littleteapot

I'm guessing anything which leaves you with a large lump-sum liability (or a small number of large repayments) e.g. BNPL would be worst, and therefore should be cleared first using any available savings, as you already intend to do.

I'm not sure which would be considered worse out of CC, Car, or PL. I'm guessing it depends on how much the minimum payment for the CC is. If this is larger than the loan, then it clearly makes sense to reduce that as much as possible, as it will inevitably revert to a high interest rate at some point in 1-2 years and hence the minimum payment will increase. So personally I would prioritise this over the personal loan, where the payments are clearly fixed for the duration of the term.

Maybe I'm being old fashioned, but when applying for a mortgage, especially if it is going to stretch my finances, I'd be very uncomfortable going into it with the wide range of debts you have. I've never had a finance plan on a car (although I have financed several used cars with personal loans in the past). I think on the two times I've applied for a mortgage the only debt I've had was a single personal loan. I made sure  I had cleared all other debts, or consolidated them into one personal loan at a low rate over 5 years several months before applying for a mortgage.

I'd be torn between using the savings to pay off most of the CC or keep it aside to help with buying/moving expenses. Hopefully someone else on here could give a clearer view on the merits of these options.

MWT

Herzlos said:

Am I right in assuming that credit card debt is going to be viewed the least favorably, and by clearing that first it'll give us the higher total borrowing amount?

That clearing the £9k of credit card debt will increase our maximum loan amount by more than £9k?

 I suggest you have a play with a couple of the lenders mortgage calculators and see what they say...

Just use the 'how much can I borrow' options and you will just be asked for the details of income and debts/expenditure, no personal details, so nothings goes on your credit file.

Then use a good broker if an opportunity arises to make a move...

Herzlos

MWT said:

Herzlos said:

Am I right in assuming that credit card debt is going to be viewed the least favorably, and by clearing that first it'll give us the higher total borrowing amount?

That clearing the £9k of credit card debt will increase our maximum loan amount by more than £9k?

 I suggest you have a play with a couple of the lenders mortgage calculators and see what they say...

Just use the 'how much can I borrow' options and you will just be asked for the details of income and debts/expenditure, no personal details, so nothings goes on your credit file.

Then use a good broker if an opportunity arises to make a move...

I'm largely stuck with the same provider since I can port a 1.89% fixed deal with 2 years remaining for at least some of it, but yeah I think trial and error is going to be the way to go here.

Herzlos

littleteapot said:

I'm guessing anything which leaves you with a large lump-sum liability (or a small number of large repayments) e.g. BNPL would be worst, and therefore should be cleared first using any available savings, as you already intend to do.

I hadn't actually thought about it that way, I figured they'd be more concerned about the higher interest rate stuff which would be the credit card though I don't think I've ever been asked about repayments. Maybe they assume it's the standard 1%. Obviously the min payment on £9k @ 0% (~£90) is going to be wildly different to the min payment at 29% (~£300!) but they don't seem to ask about that either.

littleteapot said:

Maybe I'm being old fashioned, but when applying for a mortgage, especially if it is going to stretch my finances, I'd be very uncomfortable going into it with the wide range of debts you have. I've never had a finance plan on a car (although I have financed several used cars with personal loans in the past). I think on the two times I've applied for a mortgage the only debt I've had was a single personal loan. I made sure  I had cleared all other debts, or consolidated them into one personal loan at a low rate over 5 years several months before applying for a mortgage.

In an ideal world I'd agree with you, but there aren't many houses appearing on the market and we're in a place that's already too small so waiting until we're completely debt free may result in us missing out. At the current affordability rates we're able to borrow about £200k and without any debt that's closer to £350k, which is a vast improvement against when we remortgaged this place (only being able to borrow £50k) but we bought just before the market crashed last time and spent years in negative equity.

It's just we've seen a few houses around the upper bounds of what we can afford, so being able to afford an extra £10-20k would make the difference between making an offer or not.

The sensible plan we're going for at the moment is to wait another couple of years and look at houses in the £400k range because you get an awful lot more for the money than in the £200k range. BUT if the perfect house comes up in budget before then we'll jump at it.

littleteapot

Agreed, sounds like you've thought it through pretty thoroughly already. In the absence of any firm advice here, I guess the next stop would be a mortgage adviser to get their take on how each of the other debts will affect your maximum mortgage amount, which of course will vary wildly from one lender to another. My current mortgage was taken out in 2012 before the 'affordability' criteria were added, and I've just done a couple of product transfers with the same lender since so my experience is somewhat limited.

fergie_

The banks (at this stage) don't care if a CC is interest free or not. They use a formula to say how much of your income is taken up by it and reduce the amount they are willing to lend accordingly.

Would you have scope to downsize the car and release funds / reduce payments that way?

Herzlos

fergie_ said:

Would you have scope to downsize the car and release funds / reduce payments that way?

Good suggestion and something I'd considered but I don't think it'd help enough here; the cars worth about £16k trade in and is a pretty rare high spec model. We could only get maybe £3-4k back by trading it in for an older lower spec model but I don't think it's worth it. We're limited to fairly large MPVs to accommodate wheelchair + kids.

I also doubt we'd be able to get another deal at 3.9% so that'd eat into the profit even further.

I'm also hoping that my 2024 bonuses will more or less clear the outstanding payment on it.

Herzlos

As an update, we found a house well within the budget so we didn't need to make any affordability tweaks and will just continue to pay stuff off from highest interest to lowest.

Herzlos

An interesting snippet I'd forgot to add; according to the bank, clearing the £10k* of credit card debt  would increase my affordability by about £40k, which was much more drastic than I'd expected.

*My 9k estimate was a bit off.

amnblog

Your loan will calculate out on affordability at £200 pcm less to cover the mortgage.

Lender typically calculate mortgage balances out at 3% or £270 pcm for £9,000.

Therefore, balance for balance, credit cards do more damage to affordability.