If you already have a personal Loan, you may be wondering if it will affect your chances of getting a new Mortgage.
It’s a commonly asked question but there isn’t a simple answer, as everyone’s situation is different.
In this article we explain how personal loans can affect your ability to get a mortgage, with some tips on how to maximise your chances.
Understanding Personal Loans and Mortgages
Let’s start by clarifying the difference between a personal loan and a mortgage.
Unsecured personal loan
A personal loan is a borrowed sum of money that you can use for various purposes, such as consolidating debts, financing home improvements, or buying a car.
They can be set up over 3 – 10 years.
Personal loans are unsecured, which means they are not linked to any assets you may own.
Mortgage
On the other hand, a mortgage is a loan specifically designed for purchasing a property. Mortgages have longer repayment terms and lower interest rates compared to personal loans.
Mortgage terms are 5- 40 years.
The mortgage will always be secured against a property, as extra security for the lender.
Impact of Personal Loans on Mortgages
When you apply for a mortgage, lenders thoroughly assess your financial situation to determine your eligibility.
Lenders consider your affordability, including whether you can comfortably manage your proposed mortgage repayments along with your existing debts, including personal loan repayments.
In this way, having a personal loan can impact your mortgage application.
This is not always a negative outcome, as keeping up with loan repayments can actually be beneficial for your credit rating over time.
But having an existing financial commitment will normally mean a lower maximum mortgage amount. This is because lenders take your monthly personal loan payments into consideration.
You would be offered a lower mortgage amount compared to someone in the same position, but without any monthly loan repayments.
Debt-to-Income Ratio (DTI)
A key factor in mortgage eligibility is your debt-to-income (DTI) ratio.
This compares your total monthly debt payments to your gross monthly income.
Lenders use this information to assess your ability to handle additional debt. If your personal loan repayment, combined with other debts, results in a high DTI ratio, it is likely to negatively affect your mortgage application.
While this may not completely rule out getting a mortgage, you will find there are fewer lenders in the market.
Deb-to-income calculation
The DTI calculation is as follows:
Total monthly debt repayments ÷ Total monthly gross income x 100
EXAMPLE
- Monthly debt repayments of £300
- Gross monthly earnings of £3000
300 / 3000 x 100 = 10
Your DTI ratio in this example would be 10%. Mainstream lenders prefer this figure to be less than 30%.
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What is Classed as a Debt for Mortgage Purposes?
When considering your mortgage application, lenders access your credit file and take into account various types of debts.
These may include credit card balances, mobile phone contracts, car finance payments, student loans, payday loans, IVAs (Individual Voluntary Arrangements), CCJs (County Court Judgments), and even bankruptcy.
It is essential to manage and address these debts before applying for a mortgage to improve your chances of approval.
How to Improve Your Eligibility
Fortunately, there are steps you can take to improve your eligibility for a mortgage, even with a personal loan. Here are some strategies to consider:
Reduce Loan Balances and Improve DTI Ratio: Paying off your personal loan and other high-interest debts will lower your DTI ratio, making you more attractive to lenders. Prioritise debt reduction to improve your financial standing.
Don’t use Payday loans: Lender’s don’t like them. Although a Payday loan could be repaid within a few months, it stays on your credit file for six years and will affect your ability to get a mortgage.
Check Your Credit Reports: Obtain copies of your credit reports from major credit reference agencies and review them for accuracy. Dispute any errors and ensure your credit history reflects responsible borrowing and repayment.
Improve Your Credit Score: Timely payments, reducing credit utilisation, and avoiding new credit applications can help boost your credit score over time. A higher credit score will enhance your mortgage eligibility.
Seek Advice: Consulting a mortgage broker experienced in working with clients who have personal loans can provide invaluable guidance tailored to your circumstances. They can help you understand your options, navigate the mortgage market, and increase your chances of approval.
Remortgaging
If you need to remortgage in the near future then you have two options regarding your personal loan.
Leave it alone, and continue making the normal repayments. Your remortgage will then be calculated based on the DTI and affordability.
Alternatively, you could look to repay this loan with a debt consolidation remortgage.
This will help with your overall monthly payments and eligibility for a certain size of mortgage.
However, you need to get some advice first. Consolidating loans into a mortgage will make your monthly payments lower but it also costs more in interest charges.
Allow some time to prepare
Trying to arrange a mortgage at the last minute is always going to be stressful, whether you have existing loans or not.
Give yourself plenty of time to get better prepared and know your options.
There are many ways that you can improve your situation, to make getting approved for a mortgage more likely.
But these all take time.
Approach an independent mortgage broker 3-6 months before you want to apply. You will then have an idea of what is possible and what improvements are needed over the coming months.
Additionally, some lenders almost disregard a loan when it has less than six months to run.
Are You Struggling with Unaffordable Debt?
If you find yourself in a situation of unaffordable debt, it’s important to seek help.
Dealing with overwhelming debt can impact your financial stability and mortgage eligibility. Remember that there are professionals who can help you navigate this challenging situation. Consider reaching out to debt counselling services, or debt management agencies. These experts can provide you with guidance, support, and potential debt management solutions.
Here are three UK-based companies that offer debt advice services:
National Debtline
National Debtline offers free, confidential, and independent advice on dealing with debt problems. Their advisers are experts in debt advice and their service is always free. They provide tailored advice about dealing with your debts.
You can call them on 0808 808 4000 Monday to Friday 9am-8pm and on Saturdays 9.30am-1pm. They also offer a Digital Advice Tool and a webchat service.
Website: https://nationaldebtline.org/
Citizens Advice
Citizens Advice offers phone and webchat services. They also have advice centres in England, Wales, and Scotland. They provide free, confidential, and independent advice on a range of issues, including debt.
You can call them on 0800 144 8848 (England), 0800 702 2020 (Wales), or 0800 028 1456 (Scotland). Their webchat service is available Monday to Friday, 8am to 7pm.
Website: https://www.citizensadvice.org.uk/
PayPlan
PayPlan offers free debt advice and a range of debt solutions. They provide phone and webchat services.
You can call them on 0800 280 2816 Monday to Friday, 8am to 8pm, and Saturday, 9am to 3pm.
Website: https://www.payplan.com/
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