Pay debt or apply for mortgage first

MrFreshers

Hi, looking for advice on following -

Want to buy first house in 12-15 months time.

My income £75k

Wife's income £28k

Savings in wife's name £10k

Savings in my name £0

Debt in my name £28k (all credit card). Debt utilisation is 28k/30k. Bills up to date.

In next 12 months can put aside £30k.

Do I

A) pay off all Debt and then start saving for deposit. (will then mean delaying buying)

B) pay off 50% Debt and put £15k into Savings for £25k deposit (add on to wife's £10k). And apply for mortgage.

C) alternatives?

Looking to purchase a home for £400k on a 23yr mortgage.

Advice welcome.

Woodstok2000

Assuming You are renting at the moment, how does your current rent compare to your likely future mortgage payments? I would lean towards (b), but only if you can continue to pay off the debt once your are paying a mortgage every month.

MrFreshers

https://forums.moneysavingexpert.com/discussion/comment/82052806#Comment_82052806

Yes renting at present. Will still be able to pay off debts with a big mortgage payment, albeit over a slightly longer period.

I guess I was also wondering if debts of £15k/£30k available would have a major impact on my mortgage application

Woodstok2000

https://forums.moneysavingexpert.com/discussion/comment/82052852#Comment_82052852

If you've not missed any payments and the overall debt is reducing them it's unlikely to have a major impact. You could always speak to a mortgage broker in 8-12 months time and get a more informed opinion of your options.

Exodi

Aside from the financial aspect, how did you accrue £28k in debt and £0k in savings on a £75k income? Are you deliberately holding onto the household debt while your wife holds onto the savings, or is this your own spending?

Was there a one off emergency event, or is there disparity between your incoming and outgoings. If the latter, I'd suggest option a) so you can simultaneously work on building better spending habits.

Houses have been losing value in real terms over the past few years, so I don't think there's as much urgency to buy as much and as soon as possible as the past, of course it's something you should ideally work towards in the medium term.

Woodstok2000

If you've not missed any payments and the overall debt is reducing them it's unlikely to have a major impact.

£28k on credit cards is no small sum and is near the max limit. To pay it off over 5 years is nearly £500 a month without interest. If it's your typical ~30% credit card interest rate, the payment would be nearly double that (I assume it's not though, if it is I'd be urging OP to go to the DFW forums urgently).

To put that into context, the OP is considering putting down £25k deposit on a £400k house, so a £375k mortgage over 23 years. At a 4% rate (which is generous as they're currently 5%+), that gives ~£2000 a month.

While the counter to this might be "yeah but they could just make minimum payments", but I don't think it's in keeping with this forum to suggest people should make minimum payments and carry credit card debt for decades. Especially if the plan relies on 0% interest rate deals never drying up.

born_again

I guess I was also wondering if debts of £15k/£30k available would have a major impact on my mortgage application

Yes it will in terms of affordability.

RelievedSheff

https://forums.moneysavingexpert.com/discussion/comment/82052914#Comment_82052914

They will reduce the amount you can borrow and affect your affordability calculations. So yes they will have an effect. You can play around with mortgage calculators on lenders websites to judge the effect for yourself.

How do you plan to pay for the moving and other costs associated with buying a house, solicitors, stamp duty etc? These can all add up and it looks like your planned savings will be eaten up by the deposit.

Herzlos

Debt will likely impact your affordability more than the savings would benefit it, but mortgage brokers all have different criteria.
Plus the quicker you pay off the credit cards, the less interest you'll have and the more you'll be able to save.

If you're planning on buying in the next year or so I'd start having a clear out now, and see if there's anything you no longer need you can sell to put towards debt.
I'd also check out https://forums.moneysavingexpert.com/categories/debt-free-wannabe and see if you can prune down your outgoings to get into a better shape for the deposit.

Obvious our advise is worth what you've paid for it, so I'd recommend talking to a mortgage broker with all the figures available and see what you can afford to mortgage and what steps to take next.

MrFreshers

I got into the debt through reckless spending but that is now fixed. I can afford to pay back around £2.3k per month because I personally take home around £4.7k p/m and my bills are currently around £2.1k including things like food shopping included. I will also get around a £2k net bonus in August.

When I get a mortgage, my household income will be £6.6k which easily affords a £2.4k mortgage for example, bills and debt repayment.

Clearly I should not be in the financial position I am, however my salary has only increased quite dramatically in the last 6 months or so.

Jumblebumble

https://forums.moneysavingexpert.com/discussion/6674435/pay-debt-or-apply-for-mortgage-first

Agree with @Herloz

I have always been of the view that the main thing to avoid is paying interest unless absolutely necessary

This is because I don't think it very smart to make the credit card company rich instead of myself

Exodi

Jumblebumble

Agree with @Herloz

I have always been of the view that the main thing to avoid is paying interest unless absolutely necessary

This is because I don't think it very smart to make the credit card company rich instead of myself

I tend to take a more mathematical approach.

Leveraging debt where there are higher return opportunities makes sense (stoozing is a basic example of this, but a longer term example might be my view that people shouldn't overpay mortgages and take them over as long a term as possible in favour of investing more in their pensions).

Generally there aren't many opportunities as average debt rates tend to be higher than average credit rates. I also completely recognise that humans are not data-driven analytical machines and what works in theory doesn't automatically work in practice. Consolidation loans make sense from a mathematic perspective, but in practice provide a false sense of comfort that very often leads people to build even more debt than they started with.

Leveraging debt takes a high level of financial discipline that is uncommon. I guess in a long-winded way I agree with your sentiment that generally avoiding paying interest is sensible, though for slightly different reasons.

MrFreshers what is the current interest rate on your credit card debt? Is it 0% or 30% (or something else). If it's closer to 30% you should absolute throw everything at it to get rid of it as quickly as possible before even thinking about a mortgage (including your wife's' savings to be honest).