Credit card debt and mortgage

maxaxe

My partner and I have around £30k in credit card debt between us and are looking to apply for a first mortgage. We have always made minimum payments on time. How is this likely to affect a mortgage application?

More specifically:

• Are we more likely to get better rates (or pay less overall) if we paid off (some of) the credit cards? Of course, every pound paid to credit card debt equates to one pound less deposit. Much of our deposit is in our LISAs so there would be a penalty to pay off credit card debt with it
• If we should pay off credit cards, how long before the mortgage application should we?
• In general, how do mortgage providers treat other debt? As an ongoing monthly cost or an effective reduction in deposit perhaps?
• Does the effect of credit card debt depend on the mortgage amount/house value/deposit amount? If so, any rough guidelines?
• Would a lender look more favourably on people who have had a large credit card debt, always met minimum payments, and paid it off successfully in the end? That is essentially what a mortgage is.

ACG

Like anything in our industry, there is no set answer. With over 80 mortgage lenders, you can imagine how many different ways there are of assessing debt.

If you have £30k and your limits equate to £35k - there are lenders who will likely decline you despite it fitting criteria.

If you have £30k and your limits are £60k - some of those same lenders would like accept you.

Then there are lenders who will use a sort of calculation and see you have £30k but your incomes are £60k and be ok, where as if your incomes were £59k, maybe not.

In a nutshell, the debt itself is not a problem. Its will play a part in affordability, at £30k, lenders use 3% as the repayment amount (so £900 a month - even if your minimum payments are lower). If your incomes are £100k and you want a £300k mortgage - it should be fine. If your incomes are £50k and you want £300k your going to struggle.

It is probably worth having a chat with your broker. What you have said is not a deal breaker, but you might need to be careful about your choice of lenders.

MyRealNameToo

https://forums.moneysavingexpert.com/discussion/6675339/credit-card-debt-and-mortgage

Other debt is considered as part of the affordability calculation, they will take your net income, deduct from it either your actual general living expenses or their fixed assumptions, other financial commitments and loans/CCs. Generally they seem to use a fixed percentage of the balance rather than whatever the card issuer requires as minimum payment in their calcs.

More likely it will change an accept to decline than change the interest rates… if they say you cant afford the mortgage with a 6% interest rate then clearly charging a 7% interest rate is going to make the situation worse not better.

The lender will base their decision on a combination of the CRAs stated balances and your stated balances. We have a chargecard, so it has to be paid off in full each month, when we applied for a mortgage we were told we had failed the affordability test however if we paid of the chargecard we would pass, so we paid it a week early and the lender accepted a screenshot of it now showing a nil balance as proof.

It takes a little while for the CRAs to update records, so if you want a clean pass then you would wait 6 weeks or so after paying off to apply but if they fail you because of debts that you have already cleared but the CRAs just havent updated yet they may accept proof another way.

Isthisforreal99

Hopefully these credit card debts are at 0% otherwuse your priority should be to get the level down.

As others have said, it's all relative.

sammyjammy

Just as an aside, paying the minimum is a quick way to being in persistent debt, its not a good thing to pay the minimum so whatever you decide to do start paying more than that, even if its a few £s, if one has a higher interest than the others target that first.