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We are looking to borrow a bit more on the mortgage to carry out some home improvements in the near future. Shouldn't be an issue as the LTV is currently heading towards 50% and we don't want to borrow a huge amount.
We have a loan with a few years left to run and a similar amount on a credit card. I have sold the car we got the loan for and bought a cheaper one as our requirements have changed so no need for two newer motors and this has released enough money to pay off the loan or the card.
So the question is which is best to clear with regards what affects your mortgage application? Ultimately we will be able to pay the other off next year anyway so the actual debt isn't the problem but I can't make my mind up which way to go.
I'd think if the amount to borrow isn't high and the LTV isn't either then assuming the total amount versus your income is reasonable it shouldn't matter.
Assuming you've got clear credit history you'll pass there.
You're 50% LTV so you'll pass there.
The only potential stumbling block might be affordability so it makes sense to settle the one with the highest monthly payment, however this might not be the most prudent option when it comes to total costs. Credit Card with their higher APRs and low payments will usually cost you more.
It might be worth using an online affordability calculator to see where you are, or asking your broker / bank.
the biggest one
Thanks all. Yeah, LTV will not be a problem and credit history is clean so no worries there. It was the affordability thing I was thinking of and if so the loan costs more on paper (accepting that card debt needs shifting, which it will be) so is the way to go. I just wasn't sure if different types of borrowing had different standing when applying but if that's not the case it makes the choice easier.
Credit card interest rate is likely to be higher so pay that off first.
Thanks all. Yeah, LTV will not be a problem and credit history is clean so no worries there. It was the affordability thing I was thinking of and if so the loan costs more on paper (accepting that card debt needs shifting, which it will be) so is the way to go. I just wasn’t sure if different types of borrowing had different standing when applying but if that’s not the case it makes the choice easier.
Truthfully you'll never really know what underwriting rules are applied as they're a very closely guarded secret, but yes that's how affordability works. (Whether they will accept the minimum payments based on a fixed term 0% deal I don't know, but probably).
For example, My wife and I owe about £30k for 2 cars, which is a terrifying prospect, but they're on PCP deals so cost £400 a month or so (they're fully expensed via work before anyone decides I need a lecture). This knocks £400 off my affordability on any calculation.
However, if we'd decided to buy 2 more modest cars via a personal loan, say half as much, £15k between them over 3 years, at 6% that would cost us around £450 a month.
We'd owe less, and you might argue buying outright might mean we own an asset at the end that we won't with PCP, but from an affordability point of view, we'd be £50 a month worse off.
The finance world shifted from a total debt to affordability about 10-15 years ago, which way in part the reason behind the change in products since, some people don't like the idea as often it can mean people own less stuff and lease more stuff, but it should certainly stop a lot of the problems of the past (we've got new ones now).
But the loan amount is a fixed monthly outgoing which may come into consideration on the affordability side when applying for mortgage. Credit card is a smaller amount (technically....) a month.
Also consider keeping the money, not paying anything off, but borrowing less against the mortgage. Lots depends on the actual numbers, but if for example you want to borrow to take your LTV past certain thresholds you could be stung on interest rates.
Also, I'd be tempted to talk directly to mortgage co first, before doing anything. They will give you a better steer than STW. If you pay off either of the outstanding debts, then its too late if you find out later paying the other one would have made the difference.
Credit card interest rate is likely to be higher so pay that off first.
Could be irrelevant. A loan with a smaller interest rate but much larger capital will charge more interest.
Pay off the loan that is charing the most interest first. Why would you pay a penny more in interest than you need to?