The short answer is: it depends a lot on how your debts fit into the bigger picture of your finances.
Essentially, mortgage lenders want to be confident that you can afford your mortgage repayments, and pay them on time.
So, having certain kinds of debt that you’re handling well won’t necessarily weaken your chances of getting a mortgage. (In fact, it could even work in your favour if it helps to boost your credit score.)
On the other hand, a high level of debt that you’re struggling to manage will make getting a mortgage trickier. It’ll be a “no” from many of the big high street lenders, but there are smaller specialist lenders who may still be willing to give you a mortgage.
Let’s take a closer look at how debt can affect your mortgage prospects.
Can you get a mortgage with outstanding debt?
When you apply for a mortgage, the lender carries out an “affordability assessment”. In other words, they look into your financial situation to help them decide whether you’ll be able to afford the mortgage repayments on the property you want to buy. Their calculations will take into account your salary, savings, expenses, and – of course – any debts.
Here are the key factors they’ll consider when assessing your debts and how they affect your eligibility for a mortgage loan.
1. Debt to income ratio
The debt to income ratio is a tool lenders use to work out if you can easily afford to get a mortgage despite your existing debts. It refers to the amount of debt you pay back each month as a percentage of your gross (before tax) monthly income.
Say your gross monthly income is £2,500, and every month you pay back £500 of debt. That would make your debt to income ratio 20%. That’s (£500 ÷ £2,500) x 100.
Basically, the lower the percentage, the more confident a lender will be about giving you a mortgage. A low debt to income ratio suggests you can comfortably afford a mortgage loan on top of your other debts.
Different lenders will have different cut-off points for their debt to income ratio, but many draw the line at 50%.
Also, while a higher debt to income ratio might not stop you from getting a mortgage completely, it may mean that you can’t borrow as much. You might need to opt for a cheaper property or postpone getting a mortgage until you’ve either paid off more debt, and/or increased your income.
2. Your expenses
A lender might look more favourably on your debts if you can show that you’ve reigned in your other expenses to pay them back.
Bank statements proving your low-cost lifestyle and regular repayments could help convince the person reviewing your application that you have a responsible attitude towards debt.
3. The circumstances of the debt
Why you took on your debts in the first place can affect your chances of getting a mortgage – both positively and negatively.
For example, you might be able to show that you took out a loan to cover a one-off essential expense, like replacing your leaky roof or repairing your car after it broke down. Lenders might be more understanding about this kind of debt.
On the other hand, they may not look so kindly on borrowing for non-essential purchases on multiple occasions over a long period. This could make it seem as if you struggle to live within your means.
4. How you handle debt
Just like your reason for taking on the debt, how you’ve managed your debts could also affect your mortgage application.
If you can show you’ve been making debt repayments regularly and on time, this is a sign that you handle debt well, and gives lenders a good impression. But if you’ve missed any payments or defaulted on any loans, this will show up in your credit record and affect your credit score.
A low credit score is likely to rule out the possibility of getting a mortgage from mainstream lenders, meaning you could miss out on some of the best deals. But don’t panic:
- A specialist mortgage lender may still offer you a mortgage. A mortgage broker, like Habito, can help you find a lender who specialises in mortgages for clients with adverse credit.
- You can take steps to improve your credit score. As you might guess, paying off as many debts as possible is the surest way to boost your credit score. And if you’ve got a credit card? Try sticking to below 20% of your credit limit and paying off your bill in full each month.
5. The type of debt
The type of debt you have can make a big difference in whether a lender is willing to grant you a mortgage. Let’s look at some of the key types and how lenders might respond to them:
When used wisely (keeping way below your credit limit and paying your bill in full each month), a credit card can be proof of a responsible attitude to borrowing – and bump up your credit score.
But, if you’ve got multiple credit cards that are always maxed out and you only repay the minimum every month, that doesn’t look good to lenders. Best to pay off as many cards as you can and get rid of them.
Mobile phone contracts
Many people have these, and they count as a fairly “essential” expense. So a phone contract isn’t likely to be a problem if you’re keeping up with your monthly payments. But if you’ve missed a payment or defaulted on a phone contract in the past, this could harm your credit score.
If you can easily afford the monthly payments and you need the car to get you to work, or as your main family transport, lenders shouldn’t be too concerned about this type of debt. It’s understood that a car can be a significant expense, so it makes sense to pay for it over time (much like a mortgage on a house!).
Government-backed student loans from the Student Loans Company (SLC) won’t affect your chances of getting a mortgage. But any other (commercial) loan that you took out during your student days could make a difference. As ever, lenders will be looking at how easily you can afford the debt and whether you’ve been keeping up with your repayments.
Having a payday loan on your credit record can, unfortunately, present a real obstacle to getting a mortgage – even if you’ve paid it off already. Some lenders won’t approve an application from you if you’ve had a payday loan in the last six years. Others take a more extreme view and won’t lend to you if you’ve ever had this type of debt.
But, if you took out the loan as a one-off stopgap measure to help you out during some unforeseen circumstances, and you paid it back promptly, a lender might still consider your application.
IVAs and CCJs
Having an Insolvency Voluntary Arrangement (IVA) or County Court Judgement (CCJ) against your name will seriously impact your ability to get a mortgage. Very few lenders would consider an application in this situation – they’d see it as too high a risk. The only thing that might sway it is if you’re able to provide a substantial deposit.
Being declared bankrupt makes it very difficult to get a mortgage. During the first year after the declaration, there’s almost no chance that you’ll be approved for one. But a few lenders are willing to lend after that year. The more time passes, the greater your chances will be.
Can you remortgage with outstanding debt?
Potentially, yes, you can. Lenders will assess your affordability and your handling of debt the same way as they would for a first mortgage.
Remortgaging your home while you’re in debt is different from a debt consolidation remortgage. A debt consolidation mortgage is a second loan you take out on your property to release equity, which you can then use to pay off your other debts. Basically, it’s shifting your debt from lots of smaller pots to one big pot.
Taking out a debt consolidation mortgage is a serious step, and it might not be the most effective way to tackle your debts, so it’s important to get independent financial advice before going down this road.
How can you get a mortgage with outstanding debt?
If you’re hoping to get a mortgage while in debt, why not chat to one of our Habito mortgage experts? They can provide advice and point you towards a mortgage provider with experience of working with people in your situation. Get in touch today.