A reader asked:
“A friend said not to pay my defaulted debts off but save money towards a deposit for a mortgage – is this a good idea?”
It’s often unwise to rely on friends for debt advice… They may be guessing, their situation may have been quite different from yours, or they may be assuming what happened to them years ago is still useful today.
And in this case, the friend may know nothing about the current mortgage market.
Contents
A common dilemma
This is an important question for many people.
If you have credit cards, car finance or loans which you are repaying without any problems, should you clear them, if this means saving less towards a deposit?
And how does this change if you have problem debts? Or a current mortgage?
Rising house prices make saving a deposit harder. And in 2023 it is much harder to pass the affordability checks as mortgage rates have increased so much.
You will need a very good credit record to get a mortgage with only a 5% deposit.
Deposits in most places are a lot more than double what they were ten years ago. But your wages haven’t doubled. And of course rents have gone up as well, making it harder to get out of debt and to save a house deposit.
The three different approaches
If you are serious about buying a house in a few years, there are basically three approaches you can use for the deposit vs debts problem:
- pay the minimum to the debts and maximise your deposit saving;
- pay off all the debts first then start to save a deposit;
- a bit of both: put some money away for a deposit each month but overpay your debts as well.
LISAs – a big encouragement to save
The government has been offering a large carrot for you to save for a deposit in the form of Lifetime ISAs (LISAs).
If you are aged 18-39 you can start a LISA. See MSE’s guide to how these work.
A LISA offers you a 25% bonus on the money you have added to the account that year.
With that big incentive on offer, it may sound better to start saving as soon as possible rather than repay your debts, so you can maximise the help from the government.
But although 25% sounds big, it’s important to remember that this isn’t 25% every year – it is only on the new money you have added in that year. It is really a one-off bonus – the government is not paying you 25% interest on all your savings over several years.
So it’s wrong to think I’ll be better off saving and getting that 25% bonus as I’m only paying 17% interest on my credit card balance” … because that is 17% per year every year that you are paying… after two years you will have paid 34% overall in interest to that card.
You can choose between keeping your LISA money in cash or investing it in the stockmarket. If you will need that cash for a house deposit in the next few years it’s usually better to opt for cash, despite the very low-interest rate, rather than take a gamble with this money. If you are using your LISA saving up money for a pension that you won’t need for more than 10 years, then investments make sense as drops in the stock market are more likely to get evened out in the long run.
Debts and mortgage affordability
Mortgage lenders look at all your expenses including credit card repayments, monthly car finance costs and other debts.
If you have debt at 0%, this may not feel like a problem to you. But to a lender, it is a real debt and they won’t assume you will always be able to get a new 0% deal when this one ends.
So your plan for the next few years before your mortgage application needs to include cutting your debts to low levels in relation to your income. Plan ahead for future credit – 6 months before a mortgage application is not going to be a good time to get a new car on finance or get a loan for a big wedding!
If your debt is all cheap, then you can take this steadily, repaying chunks of the debt each month and also putting money aside each month for a deposit, so option (3).
But if you have expensive debt, it’s going to be better to go for option (2). Repaying the debts as fast as possible will minimise the interest you have to pay, then you can switch to rapid deposit accumulation when you don’t have lower debt payments.
Problem debts
If you have had debt problems – your credit record has late payments or even defaults – your aim is to show the future mortgage lender that these problems are as far in the past as possible.
This means that option (1) – pay as little as possible to the debts and maximise your deposit is a very bad idea. The sooner you can pay off the problem debts the better so go for option (2).
For example, if you want a mortgage in two years time, it’s better to clear the debts in the first year. Then by the time you apply, your credit record will show old debt problems but a whole year with no issues.
This applies even if the defaults are so old they have already dropped off your credit file. That £10 a month which is keeping the debt collector happy will be viewed as a problem by a mortgage lender who will see it on your bank statements.
The most difficult problems here are where you are still in debt management – see Can I get a mortgage in a DMP? for details.
Should you use some of the deposit to pay off a debt?
So far I’ve been looking at what you should plan to do over the next 2 or 3 years. But what if you are just about to apply for a mortgage… is the application more likely to be accepted with a high deposit and some debt or a lower deposit and less debt?
If you have a very large deposit – perhaps you have just inherited some money – then usually clearing off a lot of debt is a good idea. A lender may not care if your deposit is 21% or 26%, but repaying your car finance is going to save you several hundred a month and the mortgage is going to look much more affordable.
This is a harder call when you have a lower deposit.
Some lenders may have some mortgage deals reserved for people with 15% or more deposit. Here you could drop from 19% to 16% deposit and still get the mortgage, but couldn’t from 16% to 13%. The lower your deposit, the more expensive the mortgage is and the better your credit record needs to be.
It’s a good idea to talk to a broker to try to get a feel for what different lenders might prefer at the time you are applying.
If you already have a mortgage – overpay that or save in cash?
Most of the “incentives to save” such as LISAs are aimed at first time buyers. But “second steppers” – people wanting to move to a large family-sized home – also need to save more money as the equity from their first house may not be enough.
If this is you, all the above applies if you have a lot of other debt.
But if you have very little debt and you can save money every month, you may be wondering if it’s better to overpay your mortgage or to save up the money in a separate account?
A mortgage lender won’t care if you have the money in the bank or a larger amount of equity from the sale of your current house. But it can make some difference to you.
Some of this is psychological – overpaying the mortgage can feel like a painless way to save, you just set up a larger standing order each month, then it happens automatically. And although you can reduce the standing order you can’t be tempted to “dip into” this money.
But having the money in cash gives you extra flexibility. What if you need that cash? In 2020, Coronavirus meant that many people who never expected they would have financial problems suddenly did…
Can you get a mortgage with your debts?
35-40 year mortgages – be careful!
Improve your credit score for a mortgage
Adam reed says
Hi guys, loving the site. Quick bit of advice. I am currently in default with 3 credit cards making low token payments. In the next month I’m going to use inheritance to clear my debts and be debt free. (Yes!!!). I have managed to take out another credit card in the last month to use responsibly and pay off in full every month to boost my credit rating. My question is, next Aug 2017 I’m looking to enter into my partners mortgage, I’ll be debt free but still in my 6 Yeats default. What do you think are my chances of being accepted?
Sara (Debt Camel) says
Hi Adam, it will depend who the mortgage lender is – some don’t mind repaid defaults if they are more than 3 years old. It’s best not to apply direct to a high street lender but to go through a broker.
adam reed says
Ok thanks for that Sara, just to clarify do you mean 3 years from the default date?
Many thanks
Tv says
Hi we have joint income around £45000, help to buy Isa’s x2 credit cards and car finance.
We pay off the cards more than the minimum each month so when it comes to the time to apply for a mortgage will have hardly much balances left.
We have a loan (used to buy a car ) only £97 a month and is not a problem.
We both have excellent credit ratings as pay off debt and close accounts eg sofas, wedding rings.
I’m more worried about our overdrafts as hard to get out of when paying rent/saving etc. Obviously when we have our mortgage we won’t be saving £400 a month. We hope to have 5% deposit together by April maybe a little more. I’m desperate to move to our own bigger place.
But worried they won’t like our overdrafts
Sara (Debt Camel) says
You don’t say how big your overdrafts are. Or if you are in them all the time or if you just dip in towards the end of the month. So I can’t really tell how big a problem they are.
Overdrafts can be a very hard debt to get rid of (see https://debtcamel.co.uk/overdraft/), but also very expensive – how much are you paying each month for yours? If you both have great credit records, you could look at 0% money transfers to clear them, see http://www.moneysavingexpert.com/loans/cut-loan-overdraft-costs, then you have to repay the resulting credit card balance. But if you do this you have to not start running up the overdraft again!
Betty says
Hi overdrafts are myself between £800-£1000 at end of a month but paid off on pay day.
My husband around £1800 but he gets paid weekly so always in it really but he earns around £500/£600 per week sometimes more.
We do get offered money transfer deals all the time but I don’t really want to add debt to the credit cards we already have and want to pay off.
Sara (Debt Camel) says
Overdrafts are a very difficult type if debt to clear, bu. They are often really expensive as well. See https://debtcamel.co.uk/overdraft/. Check what yours are costing you. If a money transfer would be cheaper, consider it and if you go for it don’t then let your overdraft creep up again, treat staying in the black as a priority.
Harley says
I fell into Debt young and defaulted on an overdraft aged 19, I listened to some bad advise and was told to ignore it and it would eventually be wiped and being young I believed it. Im now 25 and have just (in the last month) paid it all off. Does this mean my default was 6 years ago or do they go from the date you paid it off? My partner has a spotless credit record and we’ve saved for a deposit so we are ready to apply now, do we need to wait? will this issue from the past still be a problem?
Sara (Debt Camel) says
Hi Harley,
you need to check your credit records (see https://debtcamel.co.uk/best-way-to-check-credit-score/ for how to do this) to see what default date is on the debt. It will disappear 6 years after that date.
If you think the default date is too late, you can ask for it to be changed, see https://debtcamel.co.uk/debt-default-date/. But it can be hard to establish the default date for an overdraft as there are no set repayments each month.
Adam says
Hi there was hoping for some advice.
I have a wage of 32,500,
I have a good credit score on experian.
I currently have £14,000 deposit and hoping to buy a £90,000 house so about 14%.
I have two main debts one a personal loan of £10,000 which i pay £235 a month. The other is car finance with £2000 left on it i pay £150 a month for.
My question is should i pay off the car finance for better affordability or have the bigger deposit. Which would better my chances of being accepted ?
Thanks.
Sara (Debt Camel) says
This is such a difficult question. Different mortgage lenders may take different views! If you pay off the loan you will still have a deposit of over 10% and your loan to income will still be under 3 times. You could talk to a broker and see what they say? Sorry, that is ducking the issue. If I had to guess I would say repay the car loan, but it is a guess.
Adam says
Ok thanks. I know its a toss up really. Just wondering of my chance of getting accepted really. Nervous about the whole process.
Thanks.
Andy says
Hi, I have a credit card debt of around 3000 pounds which I did a balance transfer with so paying 0% interest on. I easily manage the repayments and more. I am currently saving to buy. I would need a mortgage for around 100, 000 pounds. My credit rating is very good so was wondering whether I should keep saving for around 5-10% deposit or clear my credit cards completely?
Sara (Debt Camel) says
If you are repaying a lot more than the minimum every month, that will probaly be fine. The best thing is to set up a standing order that will repay the 0% debt by the time the 0% offer finishes!
Luke says
Hi,
I am currently saving for a deposit in a help to buy ISA, and have saved around £2,500 to date. The issue I’ve got is that I received a letter last week telling me that I can settle my old car finance which defaulted a few years back for a 50% discount. Basically I can clear the £4,500 debt for £2,250.
It seems like a no-brainer but it has took me a long time to save for the deposit and I’m worried that it will take me years to get back to where I am now. What do you think I should do?
The default was around 8 years ago. I’ve just been paying the minimum ever since.
Sara (Debt Camel) says
As you have been paying money to it this debt is not going to be statute barred. That means that even when it disappears from your credit record (it may have gone already?) it still legally exists and you could be taken to court for a CCJ. Also a mortgage lender is very unlikely to give you a mortgage with an unpaid default.
So settling it is a good idea. You could counter offer saying £2250 is too much but a relative has offered you £x to settle it?
You want the debt collector to confirm in writing that they will not pursue you for the rest of the debt and that they will not sell the debt to anyone else.
Luke says
Ok thanks a lot for that, you’ve been a big help.
I will go back to them with an offer and see what they say but definitely going to look at settling it even if there is no movement on the figure as I agree with everything you’ve said.
Thanks again.
donna says
I currently have a credit card that I plan to pay off by August, however I have noticed that I have 2 late payments on my credit score one of last year and another from 2014. Would it be possible to apply for a mortgage in 2018?
Sara (Debt Camel) says
Just two late payments over a year ago should be ok, but go through a broker, not direct to a lender.
Anon85 says
I am currently going through a redundancy process with my work where I’ll get compensation which will clear a current DMP and still have enough for a 20-25% deposit for a house in my area. I have checked my credit report and I currently have 3 defaults, all for credit cards due to some poor financial decisions in the past. They are all currently within the last 12 months. So, by June I will have zero debts, 20% deposit and recent defaults. What are the chances of getting a mortgage if I were to find a job with circa 25k per year as a salary?
Sara (Debt Camel) says
If the defaults were all within the last year, it will be very hard to get a mortgage, see https://debtcamel.co.uk/mortgage-recent-defaults/.
Anon85 says
If the defaults were more than 12 months and the deposit was 25% would that increase the possibility or not?
Martin says
Hi, I earn good money and I don’t think affordability for the mortgage would be and issue based on the amount I would borrow. However I do have a new 20k car loan £270pcm over 8years. I can pay this off in 3 years and also have say +10% deposit on a house in 3yrs. Would I be better not paying the loan off and saving that money for a larger deposit and therefore a better rate for when I get a mortgage in 3yrs time. Or just have the 10% and be £270pcm better off.
Thanks
Sara (Debt Camel) says
Can you make overpayment to the car finance? If not, then it may be best to save up the “extra” then after 3 years make the decision to about what to do with your saving pot – add it to the deposit or clear the car loan. No need to make that decision now, so see what the mortgage market is like in 3 years.
Martin says
Yes that’s what I mean by I can pay it off in 3yrs by making overpayment, paying it off quicker will mean I’m saving on interest each month. However in the scheme of things that won’t be a lot of money at 3.1%. I think it’s best to put that money in a investment ISA and earn more interest than I’m paying. Thanks
Victoria Menzies says
Can you help? I have been saving fro a mortgage and have £2,000 in the bank. I have £6,000 debt. My debt is all at 0% but to keep it at 0% will take nearly £400 my wages every month. So im thinking of using my savings to pay the debt, I have both a Help to Buy ISA and Lisa and will be debt free by March next year instead of October and that way giving myself 18 months to save for a mortgaqe,
Sara (Debt Camel) says
“have £2,000 in the bank” is the money in your Help to Buy ISA and Lisa? Or in addition?
Sara Jane says
Hi Sara,
I have about 9k across 2 interest free credit cards, ive also got 2k saved in a LISA. I pay more than the minimum payments on the credit cards every month (around £200). I’ve got the opportunity now to be saving around an extra £200 a month due to moving in with a friend. Now i don’t know what to do with that money, do i pay the extra £200 off my debts or put it in the LISA which will give me a greater deposit because it will earn 25%?
My credit rating is great, i’ve never missed a payment and i earn a good wage.
Im hoping to get a mortgage next year with my boyfriend
Sara (Debt Camel) says
When do the interest-free periods end on each of your credit cards?
Have you tried putting your details into a good mortgage calaculator? Some ask you for very little detail, but try https://www.nationwide.co.uk/products/mortgages/our-mortgages/mortgage-calculators/mortgage-affordability-calculator. Do it twice, once with the extra money coming off the credit card debt and once with the extra money going into the LISA. See if there is a difference.
Diane says
Hi we’re really trying to get out of this debt we’re in and doing what it takes to get out of debt.and live a life that god intended us to as if you stay in debt. You never have a life as debt steals from your future until it’s done but.get will definitely get this sorted once and for all bye.
Nicole callaghan says
This is probably going to be a no brainer but Id love your opinion. Basically we are living in a rented house and are hoping to buy it from the current owners in the next few months, the issue is when we had looked at another property last year the bank’s wanted a 12% deposit from us and we only had 5% (both our credit scores have improved greatly since 999,700 etc) and we have a bigger deposit saved, depending on what the home report says the value is we may have up to 10% but I’m worried that it still won’t be enough. We have no debts between us except a car on hire purchase at £350, a few credit cards each but they are paid off in full monthly. what I’m wondering is would it be a good idea to pay for our daily living costs using a credit card for a while so we can put more towards the deposit and just make lower payments (still above minimum) I have one with a £8000 limit and one with £6000 and theyre both 0% so it still wouldn’t be a marker on my score for credit usage being over 20% it would be paid of within 3 months cause we are currently paying 4x what the mortgage would cost on rent so what would have gone to rent/help to buy payments will go towards the cards. I know they obviously don’t want us to have debt but I’m not sure if having some debt but a higher deposit would help our chances of getting the mortgage and that extra money would take us over the 12% (between us we earn 3000+ a month but the rent would still be paid out of that in the meantime)
Sara (Debt Camel) says
I’m wondering is would it be a good idea to pay for our daily living costs using a credit card for a while so we can put more towards the deposit
Don’t do it!
Go and talk to a good mortgage broker.
Nicole says
We haven’t spoken to anyone about this mortgage yet because we don’t know how much we will need to borrow at present so they wouldn’t be able to run any numbers. when I know we will be speaking to someone. I had a feeling it wouldn’t be a wise move but my fear is not having the deposit the bank wants once the full checks are done as this happened previously with another property. we got an AIP for 5% put an offer in and when it got to actually applying they said they needed 12% and the whole thing fell on it face. I know logically as our credit scores are all excellent where they were significantly lower before (due to a lack of credit in the past.. not debt or excessive usage) that the bank’s should in theory accept a lower deposit and we definitely have over 8%, up to 10% judging by house prices in the area saved currently but it’s still a worry.
Sara (Debt Camel) says
Understand the worry. But really I think speaking to a broker now should put your mind at rest.
Evelyn says
Hi…not sure if this the write place for this question
Firstly my credit score is :”poor”” whicj baffles me because I have no CCJs ..I have a default over a year ago which I have paid off three credit cards two are zero balance ..the third one is has a balance of £1600 the limit on it is £1750
Also I am saving to get a mortgage next year I have had payday loans in the past ..last one was Aug 2018 ..all of them paid off
Best advice regarding the ” poor” credit rating and getting a mortgage
Thanks
Evelyn
Sara (Debt Camel) says
Just one default makes a big difference to your credit score. See https://debtcamel.co.uk/credit-score-change/.
When did you clear this default? How large will your deposit be?
And you are using a lot of that card’s utilisation – you need to get that down fast. Aim for 30% initially than down to zero.
Re the payday loans. If you used any lenders more than a couple of times think about asking for a refund of interest, see https://debtcamel.co.uk/payday-loan-refunds/. If you win you get done cash, alway good! But also sometimes the later loans may be deleted if you borrowed from that lender a lot, which won’t improve your credit score but look better to a mortgage lender. Thus takes time so get going now.
Evelyn says
I cleared the default in Aug this year – my deposit is £10000-£12000
I am unclear of what you mean by ‘ utilizing my card ‘ – could you please explain forward
I already had refund from all my payday lenders – still expecting refunds from WDA & PAYDAYUK
Sara (Debt Camel) says
A rule of thumb is that many mortgage lenders prefer people to have not had a default in the last three years. AND to have repaid all their defaults more than a year ago. If you don’t apply for a mortgage until September next year you will be OK on the second point.
But the first point means it won’t be easy for you to get a mortgage at a good rate. Talk to some brokers about what you could get end next year. And whether it would be much better (cheaper!) if you left it another year.
“utilising” means you are using a LOT of your credit card limit. The less the better. And a zero balance – using a card and paying it off IN FULL every month gets the biggest bonus for your credit score. See the link in my previous comment for some numbers.
Evelyn says
oh no I was thinking of applying towards the tail end of next year – regarding my credit card balance – sorry I got it wrong …I have only used £150 of the £1750 – on the others they are fully paid up
Regarding Brokers – are you able to suggest any please – thank you
Sara (Debt Camel) says
oh good, £150 is fine.
Well it’s worth talking to a broker, but I would avoid the “bad credit” brokers. Too many people take a mortgage at a horrible rate because a bad credit broker has told them they will be able to remortgage in a couple of years time… but that doesn’t always work :(
London & Country and Habito are usually well receommended.
Evelyn says
Many thanks Sara – you have been a huge help – will check out the ‘ default ‘ bit and speak to the brokers you have
recommended.
Any other tips in getting my credit score high ? thanks
Enjoy a very Merry Christmas
V G says
Hi there,
I have debts on 0% of around £7k and currently saving for a deposit, have a good credit rating. Wondering what’s chances of getting approved for mortgage with this in March/April time?
Should I apply for a decision in principle now or wait until I can shift some debt to £4-5k?
Thanks
Sara (Debt Camel) says
There is a link to an affordability calculator in this article: https://debtcamel.co.uk/mortgage-with-debts/. I suggest having a go with that and if it looks positive, talk to a mortgage broker (not a lender direct) now.
Olivia says
Hi, I am looking to buy my first house at the moment. I have a good deposit (29k) but also circa 5k credit debt. As I’m looking to maximise mortgage amount to get the house I want, what is the best option as I’m struggling to find advice online. Should I clear / reduce my debt (although below 25% of total available) or pay the minimum and increase savings? Which would provide me with more total money to purchase a property? Thank you.
Sara (Debt Camel) says
No simple answer!
How large a mortgage do you need? What is your income? Have you actually seen a house or are you just planning? Are you paying interest on the card? Any other debts eg car finance?
Chaz says
HiWe are not sure what to do. We have £15k credit card debt between us, which came from when my husband lost his job 6 years ago, but always pay more than the minimum amounts each month. We currently rent, but want to buy our own place and have started saving a deposit. What would our chances be of getting a mortgage? Should we pay a bit less to credit cards and put more towards the deposit?
My credit score is in the fair category and is 814 and my wife’s is 976 in the excellent category
Sara (Debt Camel) says
then my first suggestion is that if you are paying interest on any of these cards, you should both look to balance transfer as much as possible to 0% deals. See https://www.moneysavingexpert.com/credit-cards/best-0-credit-cards/
chaz says
Would applying for more credit have a negative impact on whether a lender would then consider us for a mortgage. I understand why so we can pay debt off quicker.
Sara (Debt Camel) says
Yes if you apply just before a mortgage application. You don’t want any new credit applications in the previous 6 months. But guessing it is going to take more than a year for you to save a deposit? Then 0% balance transfers are well worth getting now. If you can clear a card with a balance transfer, you can then just close that card straight away. Some unused credit is good, but not tens of thousands.
If you can only move half the balance to 0% deals, then you need to overpay the cards charging interest as much as possible.
When all the interest charging cards are gone, then set about clearing the 0% cards – even though they are “cheap” a mortgage lender would prefer them to be gone.
it’s hard to say how low you need to get your cards and how to balance this against saving a deposit. But getting some of the cards onto 0% interest should let you start clearing them a lot faster even if you don’t pay a lot more than the current minimum amounts.
Sarah says
Hi need help.
I have been on a DMP for 9 years and still have £30,000 left to pay. Husband Lost business and some debt in my name I couldn’t go bankrupt due to job. I have 1 default from 19 months on credit file and the rest doesn’t show still have ccj. I can now afford to pay off, whet is best? Partial settlement, full settlement? I want to get a mortgage and not sure whether to keep some money back for deposit? What is best, live in council house and maybe could but outright but shutouts I clear my debts first? Our house is not big enough so will need to move eventually
Sara (Debt Camel) says
I can now afford to pay off, whet is best?
What can you afford to pay off, the remaining default? The CCJ? All the remaining debts?
maybe could buy outright
The term “outright” normally means you won’t need a mortgage – is that the case?
The house isn’t big enough – you have to repay some or all of the discount if you sell within 5 years. That’s a long while if it isn’t big enough at the moment… Is this really the right house for you?
sarah says
Yes buy the house outright but I wouldn’t sell it but re to it out to get a bigger house with a mortgage
Sara (Debt Camel) says
So you have the money to settle your debts, buy the house outright and for the cash a deposit for a bigger house? Deposits these days need to be at least 10%, probably 15%?
And with a CCJ on your credit record, even paid in full, you would be looking at an expensive “bad credit” mortgage. when does the CCJ drop off your credit record?
Sarah says
NoT enough to settle all of debts and buy the house outright. I either pay off all debts and would still have a deposit but might not get a mortgage. Or buy the house outright and stil pay off the debts which would take me longer. Eventually need a mortgage in the future to buy bigger house
Sara (Debt Camel) says
I suggest you read https://debtcamel.co.uk/ask-cca-agreement-for-debt/ and think if you should ask for the CCA agreement for the debts still in your DMP. With old loans, credit cards and catalogues, it may well be that the CCA cannot be produced by the current debt collector. If so, the debt in unenforceable and it’s not on your credit record, so you can simply stop paying it.
You can then offer to settle any debts where the CCA cannot be produced or where the debt is an overdraft or mobile or something else where a CCA is not relevant.
As you aren’t short of money, I suggest setling any debts and the CCJ that are showing on your credit record in full. It may not be necessary but you can’t predict what a mortgage lender will say.
If you can buy the house with no mortgage and only need the mortgage a year or two later, thet will help as by then all the DMP payment will be anceinet history. If you apply for a mortgage now, the lender will see all the DMP payments from your bank statements.
martin says
Hi, I am wanting to buy my 2 brothers out of an inherited property. If I were to pay them £350 each per month would either of us have to pay any tax. My fathers estate was below the inheritance tax threshold. Thanks
Sara (Debt Camel) says
I am sorry but I can’t give tax advice.
Rosemary says
Hi
I have £3.5k in credit card debt (29.9% APR). Minimum amount is usually £70-90/month and in the last few months I have been trying to pay £200/month.
I have a H2B ISA, and try to pay in the max amount a month there, and currently have about £2K. I also have another savings account and investments of about £1K in total.
Husband and I want to buy a house in the next 12-18 months. He has more savings than me and no credit card debt. We have kept our finances pretty separate til now and he does have a Buy to let property elsewhere (we are currently renting where we are).
I want to apply for a 0% balance transfer card, to pay off the credit card debt faster. He does not think this is a good idea, and he thinks I am foolish for saving in the H2B ISA rather than just using that money to pay off my credit card debt in full first.
I see his point, but I want to take advantage of the H2B isa, and I am very nervous about not having any savings of my own.
What would be the wisest thing to do in your opinion?
Sara (Debt Camel) says
I think your husband should appreciate that you will get a bigger bonus through the H2B that he is currently getting on his savings. Perhaps he could clear your credit card bill and you could pay him back at 3200 a month?
If he doesn’t fancy that, and if you are worried about not having any savings, is this really a relationship where you should buy a property together?
But he is right that it makes no sense to have credit card debt and savings. Even a 0% offer will cost you in fees, if you can get one that large.
Rosemary says
Thank you so much for your speedy and straightforward advice. I will ask him to pay it off, so I can then pay him back in instalments. (It sounds silly as we are married but there is history and I think to maintain my own dignity, your suggestion is a good one.)
If he refuses, then you’re also right, I will focus my efforts on paying off the debt ASAP, rather than saving for now. And yes, good question re: the relationship..!
Thank you for all the work you do on your site! I appreciate it so much!
Jay says
Hi,
I am planning to buy a house in 8-9 months. We have not started saving much as we had some credit card dues, which were on 0% APR for 2-3 years. We have paid of most of them and only two things which are remaining is 1) 5,500 with Barclays credit card (0% ending in May 2021) and 5,500 personal loan with Nationwide (2.5% APR, 2.5 years remaining). Currently we have £4,000 in current account and another £5,500 in company shares.
I have recently changed job and I will be able to save more each month now . Should I pay off my £5,500 credit card due with Barclays or should I do a balance transfer to MBNA which will charge me 3.9% APR for 3 years ? It will help me to save additional £5.5 k towards my deposit. I need to hit 10% deposit and it will be around 26-28K.
I have excellent credit score and never missed a payment deadline. Last credit card that I applied was in May 2019.
Jade says
Hi Sara
We sold our house late last year to repay all creditors within a DMP and managed to keep some money back for a mortgage deposit for the future. All debts were defaulted over 6 years ago so our credit file is clear. We are currently renting.
One creditor wants more than we planned to settle, it’s the last remaining debt (link) and we £13000 from old barclaycards. They’ll accept £9500 which would take our deposit down from 10% to 5%.
I’ve spoken to two different mortgage advisors, one said to pay off the debt and look at 5% mortgages and the other said to keep the debt and have the larger deposit. They said that the lender would view the debt as a loan….but it’s a problem debt so I’m not so sure it’s a good idea??
Any ideas on what I should do?
Many thanks
Jade
Sara (Debt Camel) says
Have you asked Link to produce the CCA agreement for the debt? See https://debtcamel.co.uk/ask-cca-agreement-for-debt/. If they can’t produce it, the debt is unenforceable in court and you can tell them they aren’t getting anything.
They said that the lender would view the debt as a loan
That sounds unusual to me, but if the broker says they can get you a mortgage on that basis…
Really you want to have settled all the debts 6 months before applying for a mortgage. Then the mortgage lender can’t see the old problems at all – not on your credit record and not from payments on your bank statement.
Jade says
Thank you Sara
We did request the CCA from link back in January and unfortunately they produced it last week. I have checked it over and it contains all of the required information.
We’ve negotiated with them for the last 6 months and they won’t budge unfortunately.
Sara (Debt Camel) says
Damn.
Sorry I can’t really say much about what your mortgage broker has said. Perhaps talk to another one?
Charlie says
Hi there,
I’m in a huge quandary and I hope you can help.
I’ve been self employed 14 years, and lost my main contract last year December.
I’ve not managed to find much work since, and my earnings have dropped significantly.
I’m now on universal credit and doing a part-time job but still not making ends meet.
I have been saving to a LISA account with the aim of using it as a first time buyer deposit. I have around 11.5k.
My issue is two-fold.
I have been using the money I set aside for tax to survive, as well as two 0% credit cards. I now ‘owe’ my tax around 10k. 8k is due in January 2025. A further 8k in July 2025 (I’m hoping that will be recalculated due to this year’s poor earnings). My credit cards have 4K debt on them which I pay minimum on monthly.
Should I use my deposit money to pay the debt? It’s unlikely I’ll be able to raise that type of money again, which means home ownership will never happen for me . And I will forfeit the 25% government incentive. So will end up with around 7k which would not completely cover all my debt.
Or should I try go ahead with trying to get a mortgage and hope I can get a tax repayment plan? I had a good few years before this, but I’m not sure if lenders would even consider me after this year, with such poor earnings.
I really don’t know what the best course of action is.
Should I just give up on owning a home? I don’t even know who to ask.
Thank you in advance.
Sara (Debt Camel) says
If you are on UC you have no reasonable chance of getting a mortgage in the next couple of years before your self emplyed income has built up. I think you should clear the tax debt with the LISA money.
That LISA money will also be reducing your UC at the moment. It makes no sense trying to hold on to this. Aftwer a 25% penalty, 11,500 will be reduced to about 8,600.
When do the 0% credit card deals end?