Affordability impact

meefrono2222

Hi, I’m considering paying off existing debts vs. Applying for a mortgage with them and wanted to ask here before looking for a broker. 

We make c. £120k between us, have 2 children with £600 in monthly childcare fees. Our only debts are 3 credit cards with £5000 balance, which is around 60% utilisation. (These are being paid down monthly anyway but not sure if it’s worth throwing £ at them before applying or not) 

Can someone explain how existing credit commitments affect affordability please? We are the first in our families who have the potential to own a home so don’t have anyone who can explain this to us.  

ACG

Most lenders will take 3% of the balance as a monthly commitment (£150 a month in your case). 

Have a play about on some affordability calculators, it might have an effect, but probably nothing massive. It would only be an issue if you really wanted to maximise affordability and stretch it as much as possible. 

Brie

It's a good thing to look at your overall situation rather than just at the mortgage you might want.  

What the bank did with us on our last application was to look at the mortgage we needed plus all the available credit we had.  So say £100k for the mortgage plus (for us at that time) £50k credit available on various cards.  Then they looked at our general household bills (normal monthly payments which with you would include childcare).  And then looked at our household income and how much that could support. 

So say we had £2k a month income subtract £700 in monthly bills and that leaves us with £1300 to pay the monthly mortgage payment and the minimum required on all our credit cards assuming we had maxed them out.  For us because we had so very much credit available on cards the bank was a bit iffy with us but really because the LTV for the house was so low they were ok with it all in the end.  It didn't matter that we were only using a small portion of the credit available on cards and they did in fact suggest that we lower the limits on them which would make us a safer bet overall. 

Don't forget that your available credit will include any overdraft you have available even if you never touch it and they will also take into account that you are paying your car insurance and your mobile contract monthly as those are both credit arrangements as well.  Take a look at your credit record (not your credit score) to see what is listed on there and see if there are things that can be tweaked sufficiently before the mortgage application.  Make sure you're on the electoral roll as well as these things all help.   

Hoenir

meefrono2222 said:

These are being paid down monthly anyway but not sure if it’s worth throwing £ at them before applying or not

Why pay interest that you don't need to? 

meefrono2222

Hoenir said:

meefrono2222 said:

These are being paid down monthly anyway but not sure if it’s worth throwing £ at them before applying or not

Why pay interest that you don't need to? 

They are interest only and will be for the for the foreseeable. They’ll be paid down by the end of the term, but I heard that lenders apply a multiplication to the affordability if you have outstanding debts so came her to understand what the impact could be on affordability. Eg. 5k outstanding means that they’ll
offer ‘x’ amount less… Not sure if that’s true hence my question. 

ACG

meefrono2222 said:

Hoenir said:

meefrono2222 said:

These are being paid down monthly anyway but not sure if it’s worth throwing £ at them before applying or not

Why pay interest that you don't need to? 

They are interest only and will be for the for the foreseeable. They’ll be paid down by the end of the term, but I heard that lenders apply a multiplication to the affordability if you have outstanding debts so came her to understand what the impact could be on affordability. Eg. 5k outstanding means that they’ll
offer ‘x’ amount less… Not sure if that’s true hence my question. 

Its sort of the case, but not quite that simple. 
For most high street lenders, you can have some commitments and it wont affect how much you can obtain. You have £600 in childcare costs so that will probably use up yout "buffer" so to speak. 

But as a rule of thumb if I am trying to err on the side of caution, I would say £150 x 48 = £7k-ish. But that is a calculation I use if I am driving (on hands free obviously) its probably not accurate. The calculators on lenders websites will be much more accurate. 

What you could also do if you wanted to maximise how much you can get would be to put the balance as £4k and £3k etc. 

ReadySteadyPop

meefrono2222 said:

Hoenir said:

meefrono2222 said:

These are being paid down monthly anyway but not sure if it’s worth throwing £ at them before applying or not

Why pay interest that you don't need to? 

They are interest only and will be for the for the foreseeable. They’ll be paid down by the end of the term, but I heard that lenders apply a multiplication to the affordability if you have outstanding debts so came her to understand what the impact could be on affordability. Eg. 5k outstanding means that they’ll
offer ‘x’ amount less… Not sure if that’s true hence my question. 

Lenders are being very careful just now, credit markets are volatile.

ReadySteadyPop

meefrono2222 said:

Hoenir said:

meefrono2222 said:

These are being paid down monthly anyway but not sure if it’s worth throwing £ at them before applying or not

Why pay interest that you don't need to? 

They are interest only and will be for the for the foreseeable. They’ll be paid down by the end of the term, but I heard that lenders apply a multiplication to the affordability if you have outstanding debts so came her to understand what the impact could be on affordability. Eg. 5k outstanding means that they’ll
offer ‘x’ amount less… Not sure if that’s true hence my question. 

Being honest I don`t think running three credit cards that are not fully paid down every month is a great look for lenders at the moment, one card fully paid every month would surely be better?