Mortgage market rules change constantly but the basis for lending someone hundreds of thousands of pounds to buy a house is the same. Banks operate on a simple premise: will we get paid back?
So, does having a debt make it harder to apply for a mortgage? In short, it depends on what kind of debt, or rather, whether it is classed as problem debt or not. Also, it will depend a lot on your past record.
In the case of applying for a mortgage, some debt can be a good thing, as this will develop a credit history. Owning a credit card and making regular payments will build up a picture of your creditworthiness – how reliable you are at paying back money you have borrowed.
The bank will look at your credit report, as well as your current circumstances (salary, children etc) to determine how much of a risk it is to lend you money.
In fact not having any debts could count against you, as it will mean you won’t have a credit history. If you’ve never taken out a loan or owned a credit card it can be hard for the bank to predict your reliability.
A little of bit of debt, carefully controlled and with no repayments missed, is actually a good thing.
The check of your credit score will also throw up any major black marks, which you do not want. So if you’ve had a county court judgment (CCJ) or been made bankrupt, the lender will know. This could have a serious impact on your ability to get a mortgage.
Similarly, if you have taken out an IVA (individual voluntary agreement) there could be a significant impact on your credit record, which could last for years after. You may need to declare this fact on a mortgage application for some time after the IVA was completed.
Aside from looking at your past record on paying back debt, the lender will also want to know what else you currently owe. Your existing debts, providing you can service them, will make a difference to how much you can borrow but won’t necessarily stop you from obtaining a mortgage altogether.
For example, if 50 per cent of your disposable income goes to just to service the debt, never mind pay it off, you could find it harder to obtain a mortgage.
Payday loans can be a major problem – two-thirds of brokers say they've had an application for a client rejected because a payday loan was flagged. They are not always treated any differently to other types of loans by the banks, but historic use is likely to be negative for your application. Regular use is unlikely to be looked upon favourably and the chances are that if you do keep using them you’ll end up with severe problem debt.
“If you have any outstanding loans with more than three months left on them, including payday loans, when you apply for a mortgage, they will be considered in an affordability assessment and therefore factored into a decision to lend,” a spokeswoman for Halifax told This Is Money last year.
“Typically payday loans are shorter term so may not impact the decision, but if more than three months are left at time of application then it would be considered. This is alongside a standard scoring assessment.”