Paying off debt in lump sum before applying for mortgage

VA2020

Hi all,

My partner and I are looking at buying a house together. I own my current house by myself. Income £70,000 combined per year. 

In total, combined, we have around £28,000 of debt.

Mine being £12,000 (2 personal loans taken out for home improvement - set monthly payments). 2 credit cards if needed but don’t utilise them often, if I do, they’re paid off in full each month. No missed payments etc.

I earn around £13,000 more than my partner.

Partner has around 16K of debt, 2K of that him being in his overdraft, almost fully, for around a year. He was stuck in a cycle of not being able to get out of it due to bills and clearing others debts. He’s never had any payment plans or CCJS, no missed payments etc. 

He is inheriting money, just enough to pay off his debt which he plans to pay off in full and is relieved to get rid of it. We are fortunate he was able to do this.

My question is - does paying off debt in full affect negatively when applying for a mortgage? Is there a time frame to prove you can manage money after doing this and wait?

I know this likely comes down to a pattern of behaviours in terms of living in an overdraft and living in debt and not being able to get out but has anyone had a similar experience with applying for a mortgage after?

Many thanks! 

fatbelly

There's nothing negative about paying off debt

Bigphil1474

I paid a £10k loan off a few months before we applied for a mortgage. Never came up. I doubt it will have an affect, although having a £2k overdraft for a year seems a tad wasteful. 

annetheman

I had a similar dilemma when I got my bonus. My big debt is a plan 1 student loan and MSE has a calculator which helped me determine paying this off in a lump sum was not the best option in my circumstances [EDIT: link to this article for anyone in a similar circumstance]. The rest is credit card and unsecured loans, which I had the option of paying off or using the bonus for the house purchase.

So when I knew what my bonus would be, an excellent broker helped me find out what I could borrow with the debt and without. Probably due to the house price dip in London and nothing else, I found what I wanted within the budget with debt. So I've secured my mortgage and am continuing my debt overpayment plan (see my diary, which is in a great subforum for support paying down debt!), keeping the lump payment for the house. I think the important bit is that I was already overpaying the debt, so continuing to do so was always the plan - if I couldn't do both, I might have decided to stay where I am and pay off the debt, missing the price dip and chance to buy a house in London.

Maybe try that to see what's best for you - ask a broker to basically draw up best-case scenario AIPs with the debt, and if you paid the debt off with your lump sum. Then look at what's available in both budgets. Then do the needful!

Albermarle

The fact that you have both managed your debt OK- no missed payments etc. will probably mean you both have good credit scores. 
Paying off some of the debt will mean you have less outgoings, so affordability check should come up better.

Nebulous2

I've posted this before, so I'll try to keep it brief. 

I took over £30k in debt to stooze, without expecting to need any more debt. I then decided to buy another house. A  helpful manager at Nationwide ran some figures for me and told me that each £10k in debt would reduce the amount I could borrow by £40k. 

He also told me the amount I declared at application needed to match the amount they got from the credit reference agencies, or my mortgage would be declined, requiring an appeal and a delay. 

I paid £20k off, waited until all 3 CRAs showed the reduced amount, then applied for a mortgage, which sailed through. 

In my view tidying up your affairs, and paying off debt, prior to an application, is a real positive. 

penners324

annetheman said:

I had a similar dilemma when I got my bonus. My big debt is a plan 1 student loan and MSE has a calculator which helped me determine paying this off in a lump sum was not the best option in my circumstances [EDIT: link to this article for anyone in a similar circumstance]. The rest is credit card and unsecured loans, which I had the option of paying off or using the bonus for the house purchase.

So when I knew what my bonus would be, an excellent broker helped me find out what I could borrow with the debt and without. Probably due to the house price dip in London and nothing else, I found what I wanted within the budget with debt. So I've secured my mortgage and am continuing my debt overpayment plan (see my diary, which is in a great subforum for support paying down debt!), keeping the lump payment for the house. I think the important bit is that I was already overpaying the debt, so continuing to do so was always the plan - if I couldn't do both, I might have decided to stay where I am and pay off the debt, missing the price dip and chance to buy a house in London.

Maybe try that to see what's best for you - ask a broker to basically draw up best-case scenario AIPs with the debt, and if you paid the debt off with your lump sum. Then look at what's available in both budgets. Then do the needful!

Why is the world would you be paying off your student loan like this? You shouldn't even list it or think of it as debt.

It's paid like a tax, so think of it like a tax