When to pay off existing loan before mortgage application?

SeagullFTB

Hi,

My wife and I currently own our own home (with a mortgage) but we are hoping to upsize soon. We have a personal loan with 18 months left at £395pm, which we intend to pay off early before moving home.

Based on homes we've looked at, our new home would have an LTV or around 88-90%. Not sure if that makes a difference. Based on our earnings, many online calculators say they can lend us around £380-400k. We hope to borrow around £370-375k.

My question is, when should I repay the personal loan in relation to the mortgage application? Is 1 month before okay, or should it be at least 3 months? 6 months?

The loan was taken out when interest rates were very low, so I currently earn more on the savings in the bank than I pay on the loan. So I'm delaying repayment for that reason.

MyRealNameToo

SeagullFTB said:

Hi,

My wife and I currently own our own home (with a mortgage) but we are hoping to upsize soon. We have a personal loan with 18 months left at £395pm, which we intend to pay off early before moving home.

Based on homes we've looked at, our new home would have an LTV or around 88-90%. Not sure if that makes a difference. Based on our earnings, many online calculators say they can lend us around £380-400k. We hope to borrow around £370-375k.

My question is, when should I repay the personal loan in relation to the mortgage application? Is 1 month before okay, or should it be at least 3 months? 6 months?

The loan was taken out when interest rates were very low, so I currently earn more on the savings in the bank than I pay on the loan. So I'm delaying repayment for that reason.

I was in a similar position, we didnt repay either before applying, the feedback from the underwriter was that they weren't happy on an affordability basis but if we could pay off one of the loans and our chargecard (which was silly as it has to be paid off each month in full) then they would be happy.

Paid it off leaving the other loan in place, sent them screenshots showing the payment made for both and the mortgage was approved. 

Having other debts doesnt stop you getting a mortgage, it's just considered in the affordability calculations. If you pay it off a month before the CRA may not have been updated but again you can provide them evidence it's paid off they will consider on that basis. 

GrumpyDil

My very recent experience was that showing money in savings more than covering a sum of 0% CC debt was accepted with nothing other than a comment that I'd agreed to pay the debt off (with no date specified) in the offer.

Brie

Depending on the bank your credit record will be updated within about 3 months.  So if you paid off the loan in September that should be obvious on your credit record by December/January.  That might be helpful for a new mortgage provider to see.  But if the loan is with the same bank that will be providing you with a mortgage they should know basically instantly when the loan is paid off as it would all be visible on their in house system.

eschaton

If it’s anything like credit cards for reporting then I’d give a minimum of 2 months. When it concerns a mortgage I’d be doing it at 3 months to be on the safe side. 

SeagullFTB

Thanks. Good to have a few different views on it. Probably try to pay it off 3 months beforehand just to be safe.