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Pay loan off vs save for mortgage

  • 12-12-2017 8:44am
    #1
    maxsmum
    Registered Users, Registered Users 2 Posts: 521 ✭✭✭


    Hey there. We are saving for a mortgage. - our second mortgage so we can stay in our present house for a few years. However we have a largish personal loan to clear - 25k. We have 2k a month spare to add to our mortgage fund.
    I want to clear the loan in a year and then start adding to the mortgage fund. However my husband thinks we should split 1k towards each fund. Really I don't see the point in dragging out the loan but he thinks the banks won't recognise our 2k a month paying off a loan as possible 'savings'.
    Any thoughts?


Comments

  • #2
    Browney7
    Registered Users, Registered Users 2 Posts: 3,100 ✭✭✭Browney7


    maxsmum wrote: »
    Hey there. We are saving for a mortgage. - our second mortgage so we can stay in our present house for a few years. However we have a largish personal loan to clear - 25k. We have 2k a month spare to add to our mortgage fund.
    I want to clear the loan in a year and then start adding to the mortgage fund. However my husband thinks we should split 1k towards each fund. Really I don't see the point in dragging out the loan but he thinks the banks won't recognise our 2k a month paying off a loan as possible 'savings'.
    Any thoughts?

    Max regular saver rate is approx 3% p.a (nearly half net after DIRT) with EBS. You are likely to be paying about 7% on the loan.

    I'd be paying off the loan as long as you've some semblance of an emergency fund set aside


  • #3
    Merowig
    Registered Users, Registered Users 2 Posts: 413 ✭✭Merowig


    I agree with Browney7 - it absolutely makes sense to clear the loan as soon as possible!
    You waste money not doing it.


  • #4
    dotsman
    Registered Users, Registered Users 2 Posts: 3,636 ✭✭✭dotsman


    This is very simple. The loan is the priority. You are paying far more in interest on it that you would receive in a savings account.

    But more importantly, having the loan outstanding when applying for the mortgage will be a far bigger blocker than having a smaller savings amount. Basically, you have to clear the loan outright before considering applying for a second mortgage.

    The only exception to the above that I can think of is that maybe you are only looking for a very small mortgage and simply need to get a certain savings amount to tick the box on the Central Banks ridiculous rules.

    When it comes to lending, all loan repayments are added together to determine your Debt Service Ratio (which determines how much you can be lent (with the exception of the Central bank's aforementioned ridiculous rules). Typically, banks are comfortable with a max of 40% DSR. Therefore, if the loan repayments are eating 10% of your monthly income, then that only allows you to borrow a mortgage that can be covered by 30% of your income (as opposed to 40% if you had no existing loan). Basically, in this scenario, you could borrow a 33% bigger mortgage by having the loan cleared before applying.


  • #5
    Trish56
    Registered Users, Registered Users 2 Posts: 1,256 ✭✭✭Trish56


    I agree you should pay off the loan and if you apply for a mortgage within 3 months of redeeming the loan the monthly repayments will be included as repayment capacity. If not applying within 3 months put the monthly repayments into your savings and you need to bear in mind that you will need to have a deposit of 20% of the purchase price when applying.


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