No Debt versus More Savings

[Wisecom]

Hi,

like many people my SSIA pays out soon. On top of that I already have quiet a nice bit of money saved. Combined I have circa 50,000. I have no credit card debt or personal loans, only have a car loan of 11,000 remaining.
My questions are. One, when applying for a mortgage would a bank prefer if I had 11,000 less of my own money and no debt, or 11,000 more towards the mortgage while carrying debt of 11,000?
Secondly, financially, which makes more sense? To continue paying off the loan and in hand paying the interest, or to clear the loan and use the money that was going toawards the loan to top up my savings again.

Thanks to all who reply.

 

[ClubMan]

I suspect that lenders will prefer less debt and savings than having debts and savings since they are looking at ability to service additional debt. In any case it generally makes no sense from a purely numerical/financial point of view to maintain debts (particularly high cost ones) while maintaining savings.

 

[amgd28]

One, when applying for a mortgage would a bank prefer if I had 11,000 less of my own money and no debt, or 11,000 more towards the mortgage while carrying debt of 11,000?

No debt is far more preferable to banks for mortgage purposes as they discount your repayment commitments from your available income for servicing the mortgage

Secondly, financially, which makes more sense? To continue paying off the loan and in hand paying the interest, or to clear the loan and use the money that was going towards the loan to top up my savings again.

Unless you can find a deposit interest rate higher than the rate on your loan, you are better off clearing the loan

 

[Noor77]

I suspect that lenders will prefer less debt and savings than having debts and savings since they are looking at ability to service additional debt.

Hmm, I'm not so sure about this one Clubman. Have you read "Maxed Out" by James Scurlock? It sets out very clearly how banks "preferred customers" are those people who have debt but only pay off the minimum amounts each month, hence putting huge amounts of interest in the pockets of the Banks.

 

[DrMoriarty]

In one sense, naturally, banks 'prefer' debt-strapped customers and the higher profits they generate, but I doubt that applies in the specific context of considering a loan application!

Clearing the car loan is the only sensible option here, IMHO.

 

[Wisecom]

Thanks guys. I kinda guessed paying off the car loan was the way to go. The interest i'm paying on the loan versus the interest i'm earning on the savings really menas the most sensible thing to do is to clear the debt.

 

[ClubMan]

Hmm, I'm not so sure about this one Clubman. Have you read "Maxed Out" by James Scurlock? It sets out very clearly how banks "preferred customers" are those people who have debt but only pay off the minimum amounts each month, hence putting huge amounts of interest in the pockets of the Banks.

Perhaps in relation to unsecured (e.g. CC) lending but but when it comes to mortgage lending things like IFSRA/CB prudential lending practices come into play that would usually mean that lenders will prefer less debt to more when advancing mortgages.

 

[CCOVICH]

It is a well known fact that the more debt you have reduces your ability to borrow, i.e. how many times have we seen posters asking how to repay car loans so that they can borrow more on a mortgage?