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Can you get a mortgage if you already have a personal loan?

A personal loan will always affect your mortgage application, but not necessarily in a bad way.

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By

Matthew Boyle

Updated

Fact checked

As part of the application process, mortgage lenders will check your credit history and recent financial outgoings to determine whether you’ll be able to afford your monthly repayments.

If you’re still paying off a personal loan, you may still be eligible for a mortgage.

Ultimately, it depends on the impact that the loan has on your overall spending power.

Think carefully before securing debts against your home. Your home may be repossessed if you do not keep up repayments on your mortgage.

When a personal loan could affect your mortgage application positively

A personal loan isn’t completely bad news in the eyes of mortgage lenders.

If you make your loan repayments on time, it will boost your credit score, as this is proof you’re a responsible borrower.

In fact, it’s recommended you do make some form of debt or credit repayments in the months leading up to your mortgage application in order to boost your credit score. Many applicants choose to pay some of their bills by direct debit or make monthly credit card repayments in full to achieve this. However, paying off a personal loan will have the same impact.

If you have paid off your personal loan in full without any missed repayments, there will be no negative effect on your mortgage application.

When a personal loan could affect your mortgage application negatively

A mortgage lender’s main concern about your personal loan will be its impact on your spending power.

If you’re spending £100 a month on personal loan repayments, that’s £100 less you have available to meet your monthly mortgage repayments.

Lenders will ask to see several months worth of recent bank statements in order to assess all your regular outgoings. If your loan repayments have a significant impact on your ability to repay your mortgage, your application could be rejected.

Your “debt to income ratio” is heavily considered by a lot of lenders when assessing your eligibility. The lower your debt is as a percentage of your income, the better.

Personal loan companies will run a credit check on you every time you apply for a product. These checks create a short-term knock on your credit score, so it’s best not to apply for too many personal loans in the months before your mortgage application.

A personal loan will also affect your mortgage application negatively if you miss repayments. This is a sign that you’re an irresponsible borrower and will leave a black mark on your credit score for several years.

Will a payday loan affect my mortgage application?

Payday loans are viewed differently to other types of personal loans. These short-term products are regarded as “bad debt” by a lot of mortgage lenders. Many will disregard all applications made by people who have taken out a payday loan in the last 12 months. Some lenders will even decline a mortgage application if they see a short term loan on a credit file as far back as 6 years. However other lenders will take other factors into account such as your loan-to-value (LTV) ratio and if you have had any other credit issues in the past.

Tips to increase your chances of mortgage approval

  • Pay off your personal loan in full, if possible. Once you’re done making repayments on your personal loan, it won’t have a negative impact on your mortgage application. If you’re not able to immediately pay off your loan, consider delaying your application until the debt is cleared.
  • Make all repayments on time. Timely personal loan repayments will boost your credit score, and your chances of being approved for a mortgage. Late repayments or arrears will significantly reduce your odds of getting a mortgage.
  • Clear all debts. The lower your “debt to income ratio”, the more likely you’ll be approved for a mortgage.
  • Close unused credit cards. If you have access to credit from other sources, this could harm your chances of being approved for a mortgage, as it means you have the opportunity to get into additional future debt. The more debts you clear, the better.
  • Fix your credit history. An imperfect credit record can unnecessarily harm your chances of being approved for a mortgage, so it’s worth checking for mistakes and amending them.
  • Consider using specialist mortgage lenders. There are mortgage lenders who specialise in offering deals to applicants with a poor credit score. These companies offer far higher rates than traditional lenders though.
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