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Pay off loan or save for a deposit

(20 Posts)
cinammontwist Wed 21-Dec-16 17:56:14

Not sure what the best thing to do is here.

I'm really struggling to get onto the property ladder (single, live and work in London). I have a debt of £15,000 that I could pay off in 12 months, or I could pay it off slowly and save £12000 in the next 12 months and go for a shared ownership property OR buy a cheap flat further out.

I'd save around £2000 in interest by paying it off early, but I also lose around £9000 per year in rent until I buy,

Obviously there would be more expenses with owning my own property than renting.

Emotionally I want to own my own place asap but I also think I need to clear the loan.

What would you do?

MardyGrave Wed 21-Dec-16 17:59:57

Will you get a mortgage with that level of outstanding debt?

scurryfunge Wed 21-Dec-16 18:00:28

I am not a property or financial expert but I would always prefer to have limited loan commitments when buying a property.

MuppetsChristmasCarol Wed 21-Dec-16 18:01:05

Pay off loan first. You might not get a mortgage with that amount left to pay on a loan.

RayofFuckingSunshine Wed 21-Dec-16 18:03:33

It depends what you're likely to get as a mortgage, as any outstanding amount on the loan will reduce the amount of mortgage you are eligible for.

Oddly, given the information, is probably save for a mortgage and pay the loan off slightly slower given the 7k pa saving (rent - interest) that would then be going towards an actual asset

cinammontwist Wed 21-Dec-16 18:05:27

Thanks for your replies. I hadn't thought of that. I will only be getting a mortgage for around 2.5 times my salary so I think I could probably get a mortgage even with that loan (although I'm a mortgage virgin so I'm just guessing at that).

Does it make better sense to stop paying rent sooner though?

Hellmouth Wed 21-Dec-16 18:07:39

Have you spoken to a mortgage advisor, to check if you can even get a mortgage? The level of debt you have could count against you.

cinammontwist Wed 21-Dec-16 18:09:00

Hellmouth no I haven't. That's a good idea.

Trills Wed 21-Dec-16 18:10:36

Mortgages being based on salary multiples is a very outdated way of looking at it.

These days they look at affordability = what do you have coming in and what do you have going out? Repayments on a loan would count as "money going out".

cinammontwist Wed 21-Dec-16 18:12:17

Trills I didn't know that. Repayments are going out for sure, but I could still spare around £1200 for a mortgage repayment if did secure a mortgage whilst continuing to pay off the loan.

userformallyknownasuser1475360 Wed 21-Dec-16 18:12:48

not knowing your full financial situation but can I ask what the debt is?

How about moving as much as the debt as possible to a Credit Card with a 0% interest on it, thus saving the £2k interest that way - given what you state you earn you should be able to get this credit limit from Tesco Credit Card

The £2k saved might push you a bit closer to the first rung of the property ladder

cinammontwist Wed 21-Dec-16 18:16:21

Can you transfer a loan onto a 0% balance transfer card?! I didn't pursue that idea because I didn't think you could, but that would be ace if so.

Bailey101 Wed 21-Dec-16 18:20:34

You can pay off a loan with a credit card, but ypu may get a lower mortgage offer with credit card debt then a loan. Most companies will look at the credit card being paid off at 3% of the outstanding balance, which could well be higher then the loan repayments.

cinammontwist Wed 21-Dec-16 18:24:39

Hmmm. It seems that in reality there's no short cut and I'm probably better off clearing the loan and then saving hard. It would look a lot better in terms of how I am managing my finances and possibly get a better mortgage rate. Plus it would be less risky. But I just wince at throwing £9K a year onto rent.

AccioNameChange Wed 21-Dec-16 18:26:21

Definitely speak to a mortgage advisor, you can call London and Country and they'll be able to advise you, its a free service, they take fees from mortgage providers.

DSis was told she had to pay off loan before mortgage due to new regulations (came in a couple of years ago).

Trills Wed 21-Dec-16 18:33:12

If you can demonstrate that at the moment you are paying £X on rent each month and saving £Y consistently every month, then they should look favourably on you getting a mortgage that is under £X+Y

(under because interest rates may rise)

cinammontwist Wed 21-Dec-16 18:54:21

Accio - thank you. I will call them.

Trills - I think I can demonstrate that. Certainly in 6 months time.

indigox Wed 21-Dec-16 21:21:42

Your loan will be taken into account when they're assessing the affordability of the proposed mortgage, and it will reduce the amount of money you'd be able to borrow, probably by more than £15k, but if you're only borrowing 2.5x of your salary, and the mortgage repayment will be a low % of your net monthly income you should be able to manage it. It's worth speaking to a mortgage advisor as they'll be able to do all the affordability checks, with and without the loan.

Being able to demonstrate you can pay rent and save some money isn't taken into account.

cinammontwist Thu 22-Dec-16 16:40:20

indigo that's interesting. What is considered a low % of my net monthly income?

cinammontwist Thu 22-Dec-16 16:58:20

Well, apparently I could still get a £230K mortgage with 5% deposit even with the loan.

Saving up it is then! Thanks for your input everyone.

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