ItÂ’s often unwise to reply 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 todayÂ… All mortgage lenders had to adopt much stricter rules in 2014, so if your friend got a mortgage before then, they may know nothing about the current mortgage market.
If you have debts which you are managing, how do you balance clearing them against saving for a mortgage? And how does this change if you have problem debts?
Most of the Â“incentives to saveÂ” are aimed at first time buyers Â– but second steppers, wanting to move to a large family-sized home, are also needing to save more money for a deposit as relying on the equity from their first house isnÂ’t enough.
The three different approaches
If you are serious about buying a house in a few years, there are basically three approaches you can use to the deposit / 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;
put some money away for a deposit each month but overpay your debts as well.
Encouragement to save
The government is offering a large carrot for you to save for a deposit in the form of Help To Buy ISAs. Martin Lewis has summed up Help to Buy ISAs as:
Â“a no-brainer if youÂ’re a first-time buyer saving for a mortgage deposit. You can earn up to 4% interest tax-free and then the state will add 25% free cash, and it could be Â£1,000s, on top of what you save.Â”
You have to save each month, and there is a limit to how much you can save. Full details in the above link which also looks at how the new Lifetime ISAs will work from next April.
With this big incentive on offer, it may feel sound better to start saving in these ISAs as soon as possible rather then repay you debts first, so you can get as much help from the government as possible.
But though 25% sounds big Â– and it is huge in relation to interest rates you can get on normal savings Â– itÂ’s important to remember that this isnÂ’t 25% per year, itÂ’s a one off bonus. So you canÂ’t just think Â“IÂ’ll be better off keeping my credit card balance high as IÂ’m only paying 17% interest on thatÂ”, because that is 17% per year.