Will my debts stop me getting a mortgage is a question we regularly get asked throughout the year.
The answer to this is similar to any question in that there is no generic, one size fits all answer. But having said that, there are some general rules that may help to determine how much of an impact your debt/s will have.
Debt is not a deal breaker when applying for a Mortgage
One key thing to remember is that debt in itself is not a problem when applying for a mortgage or second charge loan, particularly if it is being managed and not affecting your credit score. However the debt needs to be affordable and it important that you are making the repayments each month on time.
If you have a significant amount of debt try not to worry as there are specialist lenders that will consider more complex cases that would otherwise be rejected out of hand by the high street lenders, within reason.
Debt to income rules
Some lenders have a “Debt to income” calculation. This can vary from lender to lender but an example would be if your total debt is more than 50% of your annual income, it is an outright decline.
To give an example on debt to income calculations, you may have an income of £20,000 with a balance of £5,000 on credit cards and £5,050 on a loan. That would be an outright decline as the debt is over £10,000. However, by the time you make your next payments on the loan and credit card, there is a good chance it would be below £10,000 and at that point it would not be an outright decline.
The role of a whole of market mortgage broker such as ourselves is to look at your circumstances and research the whole UK market for the right fit of lender profile for you.
Using debt to pay debt
Where there is a significant amount of debt, one of the things lenders are looking for is if the balances are going up each and every month. This could be an indication you are spending above your means or using one debt to pay another debt which are signs of “Financial Distress”.
Lenders are more inclined to accept debt if you used the money to pay for something like a wedding (or divorce) rather than using cards to pay for general spending. To an underwriter that looks like you are living on borrowed money.
The scenario of using debt to pay another debt in the form of a second charge consolidation loan is different however as an underwriter, in reviewing the application, will see how the new loan will improve your finances. Some lenders may require the credit accounts being consolidated to be closed as a condition of the loan. Some lenders will even pay the credit accounts directly from the loan proceeds for you.
Whilst it isn’t possible to say that everyone with debt reading this post will get mortgage or second charge loan offers, it is worth noting that with a hard working whole of market broker such as ourselves in your corner, your chances are as good as any and that in the whole of 2018, we were only unable to help one client.
In short, if there are large amounts of debt, lenders are looking for people not reliant on debt, paying it on time and ideally paying more than the minimum payments.
If you have a large amount of debt, lets have a chat. We can talk through what you are wanting to do and see what is out there.