The concise response is that the impact of your debts on your overall financial situation plays a significant role in determining your eligibility for a mortgage. Mortgage lenders primarily seek assurance that you can comfortably afford your mortgage payments and that you consistently make them on time. Consequently, having certain types of debt that you manage responsibly may not necessarily hinder your chances of obtaining a mortgage. In fact, it could potentially work in your favour by positively influencing your credit score. Conversely, a substantial amount of debt that you struggle to manage can complicate the mortgage application process. While many major lenders may decline your application, there are smaller specialised lenders who may still be willing to provide you with a mortgage. Let’s delve deeper into how debt can impact your prospects of securing a mortgage.
Is it possible to obtain a mortgage with outstanding debt? When you apply for a mortgage, the lender conducts an “affordability assessment” to evaluate your financial situation and determine whether you can afford the mortgage payments for the property you intend to purchase. This assessment takes into account various factors, including your salary, savings, expenses, and, of course, any existing debts.
Here are the key factors that lenders consider when assessing your debts and their impact on your eligibility for a mortgage loan:
1. Debt-to-income ratio: Lenders utilise the debt-to-income ratio as a tool to assess whether you can comfortably afford a mortgage despite your existing debts. This ratio represents the percentage of your gross monthly income that goes towards repaying your debts. For example, if your gross monthly income is £2,500 and you pay back £500 in debt each month, your debt-to-income ratio would be 20% (i.e., £500 ÷ £2,500 x 100). Generally, a lower percentage indicates to lenders that you can comfortably manage a mortgage loan alongside your other debts. Different lenders may have varying thresholds for their debt-to-income ratio, but many draw the line at 50%. While a higher debt-to-income ratio may not completely disqualify you from obtaining a mortgage, it may limit the amount you can borrow. You might need to consider more affordable properties or postpone your mortgage application until you have paid off more debt or increased your income.
2. Your expenses: Lenders may view your debts more favourably if you can demonstrate that you have curtailed your other expenses in order to repay them. Providing bank statements that reflect a frugal lifestyle and regular debt repayments can help convince lenders that you have a responsible approach to managing debt.
3. The circumstances of the debt: The reasons behind your debts can influence your chances of securing a mortgage, both positively and negatively. For instance, if you can demonstrate that you took out a loan to cover essential expenses such as repairing your car or fixing a leaky roof, lenders may be more understanding. However, borrowing for non-essential purchases on multiple occasions over an extended period may indicate to lenders that you struggle to live within your means.
4. Debt management: In addition to the reasons for incurring debt, how you have managed your debts can also impact your mortgage application. Regular and timely debt repayments indicate responsible debt management and leave a positive impression on lenders. Conversely, missed payments or loan defaults will be reflected in your credit record and adversely affect your credit score. A low credit score is likely to disqualify you from obtaining a mortgage from mainstream lenders, potentially causing you to miss out on favourable deals. However, specialist mortgage lenders may still be willing to offer you a mortgage. A mortgage broker, such as My Contractor Broker, can assist you in finding a lender specialising in mortgages for clients with adverse credit. Additionally, taking steps to improve your credit score, such as paying off as many debts as possible and keeping credit card balances below 20% of the credit limit while paying the bill in full each month, can be beneficial.
5. The type of debt: The type of debt you have can significantly influence a lender’s willingness to grant you a mortgage. Let’s examine some key types of debt and how lenders may respond to them:
– Credit cards: When used responsibly, a credit card can demonstrate a responsible borrowing attitude and improve your credit score. However, if you have multiple credit cards that are consistently maxed out, and you only make minimum monthly repayments, this does not present a favourable image to lenders. It is advisable to pay off as many credit cards as possible and eliminate them.
– Mobile phone contracts: Since mobile phone contracts are considered essential expenses, they are unlikely to pose a problem if you consistently make monthly payments. However, missed payments or defaults on phone contracts in the past can harm your credit score.
– Car finance: If you can comfortably afford the monthly payments and rely on the car for work or as your primary means of transportation for your family, lenders should not be overly concerned about this type of debt. It is understood that a car can be a significant expense, making it reasonable to finance it over time, like a mortgage on a house.
– Student loans: Government-backed student loans from the Student Loans Company (SLC) do not impact your chances of obtaining a mortgage. However, any other commercial loans taken out during your student years can make a difference. Lenders will assess your ability to afford the debt and whether you have consistently made repayments.
– Payday loans: Unfortunately, having a payday loan on your credit record can present a significant obstacle to obtaining a mortgage, even if you have already repaid it. Some lenders will not approve an application if you have had a payday loan within the past six years. Others may take a more extreme stance and refuse to lend to individuals who have ever had this type of debt. However, if you took out the loan as a one-time measure to address unforeseen circumstances and promptly repaid it, a lender may still consider your application.
– IVAs and CCJs: Having an Insolvency Voluntary Arrangement (IVA) or County Court Judgement (CCJ) against your name will significantly impact your ability to obtain a mortgage. Very few lenders would consider an application in this situation, as they perceive it as a high risk. The only potential mitigating factor would be if you can provide a substantial deposit.
– Bankruptcy: Being declared bankrupt makes it extremely challenging to obtain a mortgage. During the first year following the declaration, the chances of approval are almost non-existent. However, a few lenders may be willing to lend after that initial year. As time passes, your chances of obtaining a mortgage will increase.
Is it possible to remortgage with outstanding debt? Yes, it is potentially feasible. Lenders will assess your affordability and debt management in the same manner as they would for a first mortgage. It is important to note that remortgaging your home while in debt differs from a debt consolidation remortgage. A debt consolidation mortgage involves taking out a second loan on your property to release equity, which can then be used to pay off your other debts. Essentially, this approach consolidates multiple smaller debts into one larger debt. However, opting for a debt consolidation mortgage is a significant decision, and it may not always be the most effective strategy for addressing your debts. It is advisable to seek independent financial advice before pursuing this option.
If you are seeking a mortgage while carrying debt, we recommend consulting one of our contractor mortgage experts. They can provide guidance and direct you to mortgage providers with experience in working with individuals in similar situations. Contact us today for assistance.