Reduce debt or continue saving??

Hi there,

I have a dilemma about what banks look at as favourable in terms of getting a loan. We have a sound savings strategy with $x% put away from our pays to save for a deposit. After savings are done I have a little bit of extra cash leftover for the week.

I am wondering what I should do with the leftover cash;

1. Put it as additional savings towards the deposit?
OR
2. Put it towards reducing my $11k car debt?

Which one would benefit me more when applying for a loan?
Thank you

 

What was the initial purchase value of the car?

Will you have any problems servicing your purchase price?

Have you talked to a broker?

 

Sell the car, catch the bus, buy an IP.

 

I personally would be paying down the car loan, more for piece of mind, sure it will aid serviceability but as I said it’s a great feeling having no car repayments and debts on a vehicle

 

Hard to say without having the numbers.... but if you have a 20% + stamp duty with your deposit then you will avoid LMI and any further deposit wouldn't really have a material benefit for the purpose of a loan application.If you have <20% deposit then that'd be another matter and you'd want to put together as much as possible for the deposit to minimize LMI.

Is your borrowing capacity sufficient without having to pay down the car debt? If so then again for the purpose of a loan application should be fine provided conduct is good.

Ultimately though things like car loans tend to be expensive at high % rates so you'd want to get rid of it sooner rather than later to minimize your overall expenses.

 

General rule is to always pay down your bad debts (ones that are not generating any monetary return) as quick as possible. But as everyone else has mentioned above, the loan could be ongoing if it doesn't hinder the property purchase.

 

what is holding you back?
a) deposit or
b) serviceability?

 

Have you spoken to a broker yet? If not, that’ll be your first step and they’ll be able to tell you what’s going to give the best bang for buck.

 

Thank you all for the replies,

No I have not spoken to a broker yet as I am planning to buy early next year. Thought it would be more appropriate to speak to one closer to the time ill be ready to purchase so I don't waste their time.

I will have around 90k saved by the beginning of next year and looking to purchase a property around 650k. So I'm expecting LMI

Me and my wife's combined income is 170k with 1 boy at 8 months old. We own an IP which is rented out and don't worry about it too much.
Not sure which would be holding us back deposit or serviceability , I was just curious to which i should put my extra funds towards.

 

You need to know what amount you want to borrow, approx, and if you can service that..

If would be good if you had 25% deposit, if this will be owner occupied, as you could avoid LMI - which might be more than the interest on the car loan.

 

I would second the speak to a broker option, then they can run some numbers for you and see what would cost you more out of LMI or higher interest rate on car loan. That way if they run the numbers for your specific situation now then you should be able to get a definitive answer as to what to focus on for the next 6-9 months to put you in the best situation

 

Thank you

 

Is your car loan variable with a redraw facility?

If so you could pay the loan down to $50 then draw the money back out when it comes time to buy a house.

 

Would still look much worse on his application than not having the car loan in the first place.

 

If serviceability isn't an issue, then this route would save interest in the meantime more so than a savings account would increase it.

 

If serviceability isn't an issue then you wouldn't need to keep the car loan, would you?
And I'd borrow against the PPOR or IP1, if that's a possibility to avoid LMI.

 

Keeping the car loan isn't because serviceability is an issue, it's so the 11k can be put towards the 25% deposit needed to avoid LMI.

Who's to say there is a PPOR or any equity in the IP?

 

Hence me saying "if that's possible".

 

Discounting a known variable for an unknown variable, smart.

 

In that case I would revert back to my original "sell the car".
If there's no equity in any property, I think it's even more important not to have a $11k car loan!