How does having loans affect getting a mortgage?

If you are in the process of repaying a personal loan, you may have questions about what impact it might have on your mortgage application. Does having loans affect getting a mortgage? Yes, it does, as lenders will always look at your credit score and examine your monthly outgoings.

It's essential to understand the long-term repercussions for your financial health before taking out a loan.

What effect does a personal loan have on getting a mortgage?

When your mortgage, or remortgage, the application is being assessed, lenders will take your debts into account when deciding your affordability. Your credit history will be a factor in their decision-making, and any unrelated debts to your mortgage will impact how your application is viewed.

It is never advised to take on a personal loan right before you apply for a mortgage, as it could affect your credit score and reduce the amount you might get offered. It could even cause your application to be declined. It is recommended to leave at least six months between taking out a personal loan and applying for a mortgage.

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What types of loans impact mortgage affordability?

Any loan will leave a mark on your credit file. This includes:

• Personal loans
• Car finance
• Overdrafts
• Credit cards
• Utility contracts
• Mobile phone contracts

If you carry out more credit searchers close together, this could cause a greater impact on your credit score. This factor could harm your chances of mortgage approval.

Why would a personal loan damage my mortgage prospects?

Getting approved for a mortgage is all about showing the lender that you are low risk. Having an outstanding loan can undermine that in the following ways:

You have too much debt

High levels of debt outside of your mortgage looks risky to lenders. If the strain on your income becomes too much, or you appear unable to focus your attention on your mortgage, they may interpret that as a sign that you will struggle.

It may indicate poor money management

If you have a personal loan, mortgage lenders may wish to know why. If you used the loan for something like a holiday, they might view that as evidence of an inability to prioritise your finances. Similarly, a personal loan that forms part of a debt refinancing plan may indicate poor money management. Things like home improvements or car purchases are less likely to be a cause for concern.

It might show desperation

Financial desperation is a big red flag for mortgage lenders. A standard personal loan is not likely to indicate desperation, but a payday loan could suggest that you struggle with your finances. Multiple loan applications in a short space of time have a similar feel and will also harm your credit score.

Does having loans affect getting a mortgage in a positive way?

With a little planning, you can use a loan to help with your mortgage application. To make personal loans work to your advantage, you need to look at the big picture.

Here are two ways a loan might help with a future mortgage application:

1. Making all the repayments on time can boost your credit score because it shows good financial management. This uptick in your credit score could be a tactical move to boost your chances of mortgage approval, but you would need expert help to get this right.
2. A personal loan can be used to consolidate outstanding credit card debts to make it easier to pay off what you owe.

Overall, it is possible to use a personal loan to help, rather than hinder, your mortgage application. The main factors will be your ability to take on additional debt and the amount of time between taking out the loan and applying for a mortgage.

Can a personal loan be used for a mortgage deposit?

Most lenders view using a personal loan for a mortgage deposit as high-risk and may reject your application. This is because it adds to the debt you will need to repay. However, there may be some rare exceptions. In these cases, a lender would judge your debt-to-income ratio alongside your income and level of debt. If they deem that you are comfortably able to repay the debt, then this method may be granted, but it is the exception and not the rule.

If you want to do this, it may help to work with a whole-of-market mortgage broker who can find you the lenders that are willing to accept a personal loan for the deposit. Nevertheless, it is a risky strategy and you should consider the following:

• Ensure you will be able to afford your mortgage repayments and the additional repayments on this personal loan debt. It's a good idea to seek expert advice before committing to any loan.
• Take out the personal loan a few months before applying for the mortgage. Some lenders need to see that your deposit capital has been in a bank account for some time before they will accept it as a deposit.

Managing debt before applying for a mortgage

Does having loans affect getting a mortgage? Yes, it does, so it is wise to take a close look at your credit history and try to reduce your debt before applying for a mortgage. You can check your credit score with the major credit reference agencies and use other tools to help with improving your credit score.

Speak to an expert if you feel you need more advice. The Mortgage Mentor app and website are full of helpful tips you can use, and our mentors are available to answer any further questions you might have. Knowing where you stand with your finances is a great way to plan and make strategies to improve your chances of mortgage approval, so get in touch for free advice.

As a mortgage is secured against your home/property, it may be repossessed if you do not keep up with the mortgage repayments.

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