Getting a mortgage if you're already in debt

23rd September 2019

man looking at calculator and paperwork

If you want to buy a home, but have got debt, you’re probably wondering whether you’ll be able to get a mortgage.

While there’s still a stigma around being in debt, it seems to be becoming more and more the norm.

In June 2019 the average UK household owed £59,166, including mortgages. And monthly household debt is expected to rise to £86,388 in 2023-24. (1)

While debt that's carefully managed can help you afford the things you want, it's generally a good idea to pay off high-interest loans before taking on any further debt.

Let’s not forget that being in debt can be expensive.

But if you really want to get a mortgage, and have credit card debt, for example, don’t panic. There are still lots of options for you.

The two big questions are:

  • how much debt you have

  • whether you make repayments on time

How debt can work for you

You may be surprised to know that having some debt can actually be a good thing when applying for a mortgage - as long as you’ve got a track record of paying it off.

Regularly paying your debts shows that you’re in control of your finances and it could improve your credit score.

There’s a delicate balance to strike, however.

Having too much debt could give lenders the impression that you’re over-reliant on borrowing and therefore too stretched to comfortably borrow more.

For example, Nationwide, one of the big six high street lenders, recommends that you keep your regular borrowing across all your credit cards below 25% of the total limit as it could have a “more positive impact” on your credit score. (2)

What lenders want to know

When assessing whether you can afford to get a mortgage, lenders will look at how much debt you’ve got and compare it to how much you earn.

They’re likely to ask you about the type of debt you’ve got and how you acquired it.

If you’re in debt because of a life event such as divorce, for example, they may look at you more favourably than if you’re in the habit of relying on debt to manage your finances.

Specialist lenders who can help

You still have options if high street lenders turn you down because you’ve got too much debt.

There are a number of lenders who specialise in ‘credit repair’ and ‘adverse credit’ who could help you get a mortgage. They include Aldermore, Precise, Kensington, and Bluestone.

The interest rate is likely to be higher than with a major lender, but specialist lenders are still worth considering.

You could get a mortgage with a smaller lender and remortgage with a bigger name to get a more competitive deal in a couple of years’ time if your level of debt and credit rating improve over that period.

Improving your credit score

It’s a good idea to reduce your debt and improve your credit score before applying for a mortgage as it could give you access to a greater choice of lenders.

If your outgoings are too high compared to your income, cut back on spending.

Pay your debts on time and consider paying off a chunk, if you can afford to.

You can keep track of your credit score by getting a credit report from an agency like Experian, Equifax or Noodle.

“If you’ve got manageable debt it shouldn’t stop you from getting a mortgage, but this will depend on lenders’ individual criteria and credit search requirements,” said Prakash Patel, a Mortgage Adviser at Trussle.

“In fact, having a small amount of debt could actually improve your chances, as long as you’re able to keep paying on time - in full where possible - and aren’t overstretched.

“Every situation is different so get some free advice from a broker to find out your best options for your circumstances.”

Sources:

(1) The Money Charity

(2) Nationwide Building Society

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