Have you found your dream home but are unsure if your debt will impact your mortgage eligibility? From student loans to bankruptcy, it’s essential to understand how various types of debt can affect your chances of securing a mortgage.
Understanding what mortgage lenders classify as debt can help you minimize the risk of loan rejection. If you have existing debts, it might be wise to focus on paying them off before continuing to save for a deposit.
Types of debt that can affect your mortgage application
Common debts include:
- Student loans
- Credit cards and store cards
- Car finance
- Mobile phone contracts
- CCJs or IVAs
- Bankruptcy
Let’s explore how each of these debts may impact your mortgage application:
Student loans
Student loans are government-backed, with repayments automatically deducted from your pre-tax salary. Generally, these won’t negatively impact your mortgage application. However, if you have other loans from your student years, these could affect your eligibility for a larger mortgage, depending on factors like the loan amount, repayment history, and remaining term.
Credit cards
Using credit cards responsibly can improve your credit score. Lenders prefer borrowers who spend a reasonable portion (around 20%) of their credit limit and pay off the balance in full each month. However, maxed-out credit cards with only minimum payments can harm your mortgage prospects.
Car finance
Car finance is often viewed as manageable debt, especially if you can demonstrate consistent and timely payments. Since a car is essential for most people, lenders typically understand this type of debt, provided you manage it well.
CCJs and IVAs
County Court Judgments (CCJs) and Individual Voluntary Arrangements (IVAs) can severely impact your ability to get a mortgage. These are not debts themselves, but legal measures taken by creditors to recover money. Most lenders are reluctant to approve a mortgage for someone with recent CCJs or IVAs unless you have a substantial deposit. Speaking with a mortgage broker may help find lenders more suited to your situation.
Bankruptcy
Bankruptcy presents a significant barrier to getting a mortgage, especially during the six years following the declaration. Although challenging, securing a mortgage is not impossible. Some lenders consider applications from individuals discharged from bankruptcy, but higher interest rates and a longer waiting period may apply. A mortgage adviser can help you explore these options.
Understanding the reasons behind your debt
Mortgage lenders will assess why you incurred debt. While some, like student loans, are straightforward, others, such as short-term payday loans, may require explanation. If your debt history reveals a pattern of borrowing over a prolonged period, this could signal poor spending habits, which may deter lenders.
Tips to improve your mortgage chances despite debt
If you’re concerned that your debt may impact your mortgage approval, there are several steps you can take to improve your financial situation and boost your credit score:
- Regularly check your credit score
- Avoid missing repayments
- Refrain from applying for new credit before submitting your mortgage application
Get expert mortgage advice
Navigating the world of debt and mortgages can be complex, but a mortgage adviser can provide valuable guidance. We can help you understand your credit score, offer tips to improve it, and determine whether your application is likely to be approved. If you’re currently in debt, contact us for a free, no-obligation consultation to discuss your options and make informed decisions about your mortgage journey.
Important information
Your home may be repossessed if you do not keep up repayments on your mortgage.
There may be a fee for mortgage advice. The actual amount will depend upon your circumstances.
The fee is up to 1% but a typical fee is £598.
