Q My husband and I have £27,000 worth of debt on loans and credit cards that we pay back monthly. We have never defaulted on these payments but feel like we will never see the back of the debt. We are looking to move and have recently put our house on the market. From the valuation we received, we would be looking at making approximately £90,000 on our property.
Should we plough this money into our next, more expensive, house with a smaller mortgage but still having to pay our other debts monthly or should we use some of it to get rid of the debt?
We both live and work in Leicestershire, are in our late 30s and have two school-age children.
A If you genuinely can, I would definitely get rid of your £27,000 debt, provided you resolve to live within your means in the future.
However, until your debts are cleared, their existence will have a seriously detrimental effect on the amount a mortgage lender is prepared to lend you for your new home. When assessing mortgage affordability, most lenders assume that you make monthly repayments of between 3% and 5% on credit card debt and factor that into their calculations, along with the monthly repayments you make on personal loans. In a lender’s eyes, the amount your are spending on your debts reduces the amount left over to meet mortgage repayments. So it could be that you have to put the whole £90,000 – rather than the £63,000 you would be left with if you cleared the debt – towards your new home because you can’t get a big enough mortgage.
If this turns out to be the case, you might want to think about transferring the balances on your current credit cards to a credit card that charges 0% on balance transfers for the first two years of having the card (search “balance transfer” online). That way your monthly credit card payment will actually go towards clearing the debt rather than – as I suspect – paying the interest on the loan.