Reply to: Loans advice

[xenomorph]

The money for your deposit is in the company?

yes so plan to take out as dividends in next tax year.
I got a warchest still in company to pay myself if I am out of contract, then I got my usual dividends for the year which I keep at low tax band and then rest of the money is kept there to be taken out when I need deposit.
before anyone says where will I get money for tax then then by 2023 January I have a plan. so that is not a issue.

[eek]

Some of those assumptions are wrong:

- I have 4/5 month warchest in my company the rest of that is for deposit and stamp duty so dont want to dig into that.

If I used warchest to pay off debt then im back to square one, where do I find funds to pay the extra tax a year after I just bought a house...after buying a house I wont have much spare cash and still need to keep 4/5 month warchest in company untouched just in case out of contract.

- These debts are from years ago before I was contractor. only been contracting a year and half so far so dont expect to use credit cards like I used to

With on going world issues house price crash is almost bound to happen once stamp duty holiday is over and thats when I need to buy when market is lower priced so then when it recovers I will be better off.

The money for your deposit is in the company?

[xenomorph]

Sounds to me like you don't have a lot of margin for error to be buying a house.

You could take dividends to clear an £8K debt but you don't have enough to be able to pay the higher rate tax if you did. That says you don't have any kind of substantive reserve in your company if you end up out of contract. You obviously don't have any extra personal reserve or you'd use that to pay the cards. And, you have credit card debt, which hardly screams 'fiscal responsibility'.

Your real solution is not dividends or director loans or personal loans. Your real solution is to sort out your spending habits to fit better within your income. Otherwise, you're going to be back with CC debts a year after buying your house, perhaps a lot higher, and with a mortgage looming over you, possibly after a house price crash so that you'll be upside down in your mortgage.

You need to figure out how you are going to save the money out of current income to pay off the debt. You need to do it roughly a year from now. That may mean you have to avoid stupid spending on Christmas, cut out the pub (it's a good way to catch a virus anyway), whatever. Sit down and figure out exactly where the money is going, decide what isn't essential to life, and do without it for a year.

If you have a plan that will pay off the debt within a year that also includes room for the unexpected like car repairs, then implement it for the next two months. If you are carrying through, your debt will be £1K less than it is now, or better, at the end of the year. If so, then the directors loan makes sense, and if you keep going you'll have a third of it paid off before the end of your tax year in April.

If you aren't carrying through, with less debt by the end of the year, sorry, you can't afford to buy the house. You don't have enough income to support your lifestyle and a house, and you don't have the discipline to change the lifestyle that quickly. Change either your income or your lifestyle first, then buy a house.

Some of those assumptions are wrong:

- I have 4/5 month warchest in my company the rest of that is for deposit and stamp duty so dont want to dig into that.

If I used warchest to pay off debt then im back to square one, where do I find funds to pay the extra tax a year after I just bought a house...after buying a house I wont have much spare cash and still need to keep 4/5 month warchest in company untouched just in case out of contract.

- These debts are from years ago before I was contractor. only been contracting a year and half so far so dont expect to use credit cards like I used to

With on going world issues house price crash is almost bound to happen once stamp duty holiday is over and thats when I need to buy when market is lower priced so then when it recovers I will be better off.

[WordIsBond]

Sounds to me like you don't have a lot of margin for error to be buying a house.

You could take dividends to clear an £8K debt but you don't have enough to be able to pay the higher rate tax if you did. That says you don't have any kind of substantive reserve in your company if you end up out of contract. You obviously don't have any extra personal reserve or you'd use that to pay the cards. And, you have credit card debt, which hardly screams 'fiscal responsibility'.

Your real solution is not dividends or director loans or personal loans. Your real solution is to sort out your spending habits to fit better within your income. Otherwise, you're going to be back with CC debts a year after buying your house, perhaps a lot higher, and with a mortgage looming over you, possibly after a house price crash so that you'll be upside down in your mortgage.

You need to figure out how you are going to save the money out of current income to pay off the debt. You need to do it roughly a year from now. That may mean you have to avoid stupid spending on Christmas, cut out the pub (it's a good way to catch a virus anyway), whatever. Sit down and figure out exactly where the money is going, decide what isn't essential to life, and do without it for a year.

If you have a plan that will pay off the debt within a year that also includes room for the unexpected like car repairs, then implement it for the next two months. If you are carrying through, your debt will be £1K less than it is now, or better, at the end of the year. If so, then the directors loan makes sense, and if you keep going you'll have a third of it paid off before the end of your tax year in April.

If you aren't carrying through, with less debt by the end of the year, sorry, you can't afford to buy the house. You don't have enough income to support your lifestyle and a house, and you don't have the discipline to change the lifestyle that quickly. Change either your income or your lifestyle first, then buy a house.

[Lance]

yeah im thinking pay off cards via directors loan by xmas and then I will have 4 months of no debt before mortgage in May.
can think about how to pay off the loan in December next year to avoid going over 9 months.
less loan I need to take out after buying a house the better so covering dividend tax plus payments on account vs directors loan makes sense to go for dl as it will be lower amount to clear off.

But you will have a debt to your company.
Take the dividends now and you don’t have to pay the extra tax till jan22.
And you will be genuinely debt free.

[xenomorph]

This was posted on hpc earlier this week - I post it as it outlines what you need to do




So if you are starting to buy in March next year - you want the credit cards paid off sooner rather than later - so I would be looking at a directors loan to clear them off by December ready for a few months of using them as purchase only cards.

Oh and find a decent broker who understands how contractors work.

yeah im thinking pay off cards via directors loan by xmas and then I will have 4 months of no debt before mortgage in May.
can think about how to pay off the loan in December next year to avoid going over 9 months.
less loan I need to take out after buying a house the better so covering dividend tax plus payments on account vs directors loan makes sense to go for dl as it will be lower amount to clear off.

[xenomorph]

Top tip: when you pay yourself a dividend put aside a proportion (say, 15-20%) of it as savings towards the tax bill

yup thats what I been doing.
however for the extra if I do the same then I wont have enough to cover the cards as 32% of that would be saved aside for tax.
so my option are directors loan which I take loan or dividends at lower amount to pay off the loan before 9 months is up.

[eek]

This was posted on hpc earlier this week - I post it as it outlines what you need to do

I'd agree in principle. Though if you spend time on the MSE mortgage forums it's clear it's very difficult to get a mortgage deal if you've any kind of black mark on your credit record.Most people nowadays have to plan for months to be ready to apply for a mortgage. They will pick apart your last 3 months bank statements at a transaction level. Get your travel and childcare costs to make sense on your bank statement compared to your application (as most people tend to underdeclare these) , make sure you don't have any red flag transactions like 'gambling payments' on your account, clear or tidy up overdrafts and credit cards at least 3 months prior to the application, spend weeks trying to remove markers from your credit record for small payments you missed ages ago to silly little things like a missed mobile bill payment or sky payment etc.Under the new credit rules any small things like these can really erode your affordability.
Even applying for more than one mortgage can impact your chances of getting one. You will normally be advised to take a 'cooling off period' of at least 6 months if you've failed 2 proper applications. This will be shown on your credit record. In theory your broker will chose a bank likely to accept you on first pass.
Mortgage affordability under MMR is a bit of a dark art, most people still have no idea the amount they will be lent will be reduced by childcare costs, student loan repayments etc. I recall one exple when MMR came in where a single guy on a low salary would be given a mortgage of £80k, but if their application was rerun to add a partner on benefits and 1 dependant child then under the rules it would drop by £79k to less than a grand despite the fact they were still taking home the same salary. Its nowhere as simple as 4x salary anymore.
As the market is pushing most people to the very edge of their affordability, this becomes more important as the banks feel they can pick and choose customers. I'd say the proliferation of mortgage brokers is a canary in the coal mine for a broken market.

So if you are starting to buy in March next year - you want the credit cards paid off sooner rather than later - so I would be looking at a directors loan to clear them off by December ready for a few months of using them as purchase only cards.

Oh and find a decent broker who understands how contractors work.

[ladymuck]

Yes i agree but sadly its not as simple as that.
If I take dividends this tax year to clear all credit cards then I will then need to take some form of credit or loan to pay the extra tax on that.
So come January 2022 I will need to borrow extra to cover dividend tax plus payments on account. Which will be a bigger amount then borrowing to pay back directors loan.
So whatever way I will need to take out some form of credit. The lower the credit I take out the better.
Previous poster had a good idea in take out Directors Loan to clear off the cards and then try pay off in 9 months then no issues. If I cant pay off 9 months after accounting end dates then whatever amount is left I can take a much smaller loan to pay remaining directors loan.
This way my debit will be clear at application of the mortgage and wont need to get loan until after I got the property.

Top tip: when you pay yourself a dividend put aside a proportion (say, 15-20%) of it as savings towards the tax bill

[xenomorph]

Yes i agree but sadly its not as simple as that.
If I take dividends this tax year to clear all credit cards then I will then need to take some form of credit or loan to pay the extra tax on that.
So come January 2022 I will need to borrow extra to cover dividend tax plus payments on account. Which will be a bigger amount then borrowing to pay back directors loan.
So whatever way I will need to take out some form of credit. The lower the credit I take out the better.
Previous poster had a good idea in take out Directors Loan to clear off the cards and then try pay off in 9 months then no issues. If I cant pay off 9 months after accounting end dates then whatever amount is left I can take a much smaller loan to pay remaining directors loan.
This way my debit will be clear at application of the mortgage and wont need to get loan until after I got the property.

[ladymuck]

So for that option if my account year end is April 2021 then I have to pay it back to my company by December 2021?

4 + 9 = 13 so that would be January 2022

Do bear in mind that your accountant won't file your CT600 until your loan is repaid. Doesn't much difference as the amount of CT shouldn't change but it can't be filed until the loan is repaid or declared as outstanding. I can't remember if the CT600 changes if the loan remains outstanding, it's not a situation I've been in.

However, as Lance says, maybe just take the hit on the tax and take a dividend to repay if you want to show that you've cleared (and kept clear for several months) all your debts. Yes, it may cost more than interest but what value does your credit rating have if you're wanting a mortgage?

[Lance]

I'm not sure any lender is going to see a consolidated debt as much better than credit cards when it comes to assessing your ability to pay off a mortgage.
If you want to improve your credit rating then take the dividends to pay off all debt.

[xenomorph]

That's why I asked how much time you had.

Another cunning way to get your credit utilisation down is to get a new credit card but don't use it. Its overall credit usage, not per card. So, you could move anything interest bearing to a 0% card but don't close the paid off account. If you've got a low credit rating then that might not be achievable for you.

By the sounds of it, I'd go with a loan from your company and take out a means of repayment before the 9 months are up.

So for that option if my account year end is April 2021 then I have to pay it back to my company by December 2021?

[ladymuck]

That's why I asked how much time you had.

Another cunning way to get your credit utilisation down is to get a new credit card but don't use it. Its overall credit usage, not per card. So, you could move anything interest bearing to a 0% card but don't close the paid off account. If you've got a low credit rating then that might not be achievable for you.

By the sounds of it, I'd go with a loan from your company and take out a means of repayment before the 9 months are up.

[xenomorph]

When you say purchase next year, when are you planning to apply for your mortgage, what sort of time do you have to repay the debt in?

If I had enough time, I'd look at 0% balance transfer credit card and pay as much as I could afford each month.

Alternatively, if time is short and depending on year end timings etc, you could take the loan from your co, then sort your mortgage out, then take out a personal loan / 0% money transfer credit card and repay the loan within the 9 month period.

Not planning on getting property until earliest May 2021.
My accounting year end is April 2021.
2 of the cards I am paying interest currently and other 1 interest starts June next year. So ideally want to pay off them before xmas. Then come May credit score should improve as no high credit use on the cards.
Issue with 0% card is you cant request certain amount plus not good for credit score if you utilize more then 30% of your cards limit so would need a very high limit to pay off 8k and remain within 30% of limit.