Should I use some of this money to pay debt?

[moneyQ]

I am extremely fortunate and have inherited £28,000.

I currently rent and would like to buy - I spend a fortune on rent every month but living just outside London and earning my (good salary), buying a one bed flat would still be tough even with the £28k.

I have zero savings but approx £18k debt - mixture of credit cards and a loan on very low interest - blame my ex and my stupidity!!

I will never again have this sort of money to hand

My question is - should I use £4.5k of the money to pay off my credit cards - they are gathering interest and affecting my credit score I'm sure. I would feel better with the one loan to pay off every month. I could save the other money I'm spending on repayments

It would of course deplete the money I have for a (very small!) deposit, stamp duty etc but less debt would be good for buying

If the context helps I guess I'll be looking to spend £280k on a flat, and will have a less than 10% deposit as also need to use money for fees, associated costs etc

Only a small decision I know but I can't decide!!

Id pay off at least 10k off the debt inc all the credit cards. Then refinance the rest with as low an interest rate as you can. Cut up your credit cards.

If it was me I'd pay off any/all debt, pay what's left into a decent savings AC and top it up monthly by the amount you would have been paying towards debts...

I'd pay off all the debts and the save what you've been paying on them each month until you've got enough for a deposit again

You have to declare all your debt when applying for a mortgage as part of the affordability checks.

When we applied for our mortgage just over two years ago, DH had about 2k of work expenses on a credit card and we were heavily quizzed over why we weren't using our deposit to clear that. We ended up having to evidence that it was work expenses.

Bear in mind that we were fortunate enough to have a 30% deposit.

I would talk to a mortgage broker like L&C who are free and will be completely up front about what the best thing is to do and how much you can expect to borrow.

Thanks for the responses

Reason I didn't want to pay off all debt is that it would take me about 3.5 years to save £18k by which point I'd have spent about £35k on rent which I thought would be better going into a mortgage

Thank you for your help - will think on it!

The going is you won't get a mortgage with that kind of debt, so you'll still be spending on rent.

Pay off the debt, then one day you might be able to get a mortgage.

The going is you won't get a mortgage with that kind of debt, so you'll still be spending on rent.

That's not strictly true, you can get a mortgage when you have debt but they'll offer you a higher rate

Overall you're better paying off the debt, 3.5 years isn't that long to save in the long run

sooper not necessarily.

Debt is going to reflect negatively on your chances of getting a mortgage, it will lower your chances of being accepted as well as affecting the interest rate if you are approved .

....... firstly it doesn't show you're financially responsible.

Secondly will you be able to balance a mortgage with servicing an 18k debt? Prob not if you've been unable to live debt free on your current salary.

Debt of this level is a huge red flag to lenders.

Agree with above, deffo pay off debt. A higher interest rate on your mortgage could make a massive difference - we just moved to a lower rate and saved 400 a month.

Thank you all

Appreciate debt is not a good thing to have! I am living ok at the money paying more on rent than I would on an equivalent mortgage but paying off debt rather than saving. My income is healthy and I can afford a mortgage - it's just getting one that's tricky

Well i was also going to say id pay off all the debt because i have a lot of debt and it would be incredible to have it all gone. But it would be hard parting with all that money and having nothing tangible to show for it. If you paid all the debt you'd still have 10k in the bank and you wouldn't have to pay interest.

Could you ask a mortgage advisor? I don't think having a loan will effect your mortgage too badly. I can totally see why you would like to keep a lump sum ready for a property.

I think you should pay off all the debt as it's costing lots of money in interest. If you're keen to buy, you could look at some government schemes - like help to buy or shares ownership as things become possible with limited deposits.

I think any debt will impact how much you can borrow. In the past (and this was when it was easy to borrow) I have had the monthly payments added up, multiplied by 12 and that lump removed from my income and the income multiple based on the lower income figure.
Also, if you fall into 85% or higher loan to value there may be questions surrounding your ability to manage your finances as your debt was repaid by a one off lump sum, rather than you cutting back your day to day spending and living within your means.
I second the suggestion to seek advice from London and Country, they will explain what your options are.

I would certainly get rid of the credit cards if nothing else.

You need to speak to a mortgage broker to find out your options. The debts will reduce your ability to borrow, and they will know which lenders are best to approach in your situation.

As well as a deposit, you also need to factor in fees and other costs associated with a purchase.

Remember that when you buy a 1-bedroom flat, it is likely to be leasehold. So you will also need to pay service charges on top of your mortgage. These can sometimes add up to a lot monthly. Then you'll also need to put by money for if your boiler dies a death or whatever. So the costs of owning are not as simple as "mortgage less than equivalent rent" because you need to account for these extra expenses.

Not trying to put a dampener on your plans, but I think it's important to understand what your real situation is before you do anything like paying off £18K. The credit cards need to go if you are paying interest on them. The loan is trickier, and you need advice tailored by someone who can see your whole financial position. You'd do well to get into a position of saving some money every month if possible, so putting that credit card repayment money by.

Is there any possible way you could go for a two bedroomed flat somewhere different and rent out a room?

Pay off the debt.

That level of debt will effect the amount you can get on a mortgage, if you can find one in the first place and you would likely be lumbered with very high interest rates. If you pay the debt off you look much more attractive even with a smaller deposit, and you'll save quicker as you're not paying interest on 18k of debt.

When we got our mortgage we had to have zero debt. We had 25k savings and had to repay £2k cc before they'd approve our mortgage.

You've not said what your salary is other than 'healthy' but reading between the lines

• if you'd pay £35k in rent in 3.5 years your rent is £833 per month
• if you'd save £18k in 3.5 years you'd save £440 a month
• If you use the rough rule of 4.5 salary as a guide (you wouldn't get that with debt) you need to be on £56k with no debt to borrow 90% of £280k
• the fact you've accrued £18k in debt means you're leaving beyond your means currently and your rent is much lower than a mortgage will be

Mortgage lending is all about affordability nowadays and, if my calculations above are in the right ball park you won't get a mortgage the size you want.

Unless your salary is significantly over £56k any debt will hinder your chances of a mortgage but, if your salary is that high, your expenditure habits that led to £18k will likely scupper you.

The best bet would be to clear as much debt as you can and potentially look at a cheaper property a bit further down the line.

I'd pay off all of the debt.