Credit card debt is common – a survey carried out by Credit Connect found that a third of adults have it, owing an average of £2,966. But no matter how common it is, you might be worried about how it will affect your ability to get approved for a mortgage.
Can I get a mortgage with debt?
The good news is that debt doesn’t automatically bar you from getting a mortgage. However the amount of money mortgage lenders are willing to lend you, and the stipulations the money comes with, will depend on the type of debt you owe, the amount of it, and how you got it.
When deciding whether you’re a safe bet despite your debt, mortgage lenders will consider a number of things.
Debt to income ratio
This is the amount of debt you pay back per month as a percentage of your monthly income. For example, if you pay back £700 a month in debt and you have a monthly gross income of £2000, your debt to income ratio will be 35%.
Different lenders will have different thresholds of what counts as an acceptable debt to income ratio. But generally the lower the number the better your chances.
For credit card debt, most mortgage lenders will assume you’re paying back between 3% and 5% of the debt each month. But remember that in this equation your credit card debt isn’t the only thing that counts – it will include all your debt. So if you have an existing mortgage, or something else like an outstanding car loan, that will affect your debt to income ratio too.
The mortgage lender basically needs to be sure you could afford monthly mortgage repayments as well as your existing repayments. If your monthly income and outgoings (including debt repayments) don’t leave much wiggle room – so a minor change in your circumstances could leave you unable to meet your mortgage repayment obligations – you’ll be seen as a greater risk and will be less likely to get a mortgage.
Debts that you’re not currently making repayments on – for example, an outstanding student loan if your income is below the threshold – won't be included in the calculation.
How you got the debt
Mortgage lenders will also look at how you got the debt in the first place. If your credit card debt was accrued from a single one-off payment – for example, to renovate your property – this won’t be as much of a problem as if you built it up gradually by continuously overspending.
The type of debt
Some debt is seen as less risky. A car loan, for example, is unlikely to be a huge issue, as is a student loan. But payday loans are an immediate red flag for mortgage lenders. In fact, even if you’ve completely paid off a payday loan, you might still be prevented from getting a mortgage for a while.
When you plan on paying off the debt
If you have firm, realistic plans to pay off your debt before you buy the property or soon afterwards, some mortgage lenders may be happy to factor this into their affordability assessment. But for obvious reasons many banks are wary of doing this.
How can I increase my chances of getting a mortgage?
The first thing you should do is pay off what you can of your outstanding debts. If you’re not able to pay it all off in one, prioritise. Pay off debt you accrued by regular overspending first, as loans for big one-off payments will be viewed more favourably by mortgage lenders. Any repayment will bring down your debt to income ratio, which will work in your favour.
And remember – the percentage of credit used might be a factor. So if you can pay down a credit card so you’ve used less than 20% of available credit, that could really help.
You can also build up your credit score, a key indicator of your financial trustworthiness that mortgage lenders will consider. Read about how to build good credit.
It might feel counterintuitive, but if you need to apply for a mortgage right now then reducing the amount you’re paying back towards your debt might help, if you’re able to (ie if you’ve been paying back more than the minimum repayment needed each month). Lower overall monthly expenditure makes you a safer bet for mortgage lenders.
If you want more advice on finding the right mortgage for you, a mortgage broker is a good idea.
Debt won’t automatically stop you from getting a mortgage, but if it demonstrates financial irresponsibility or has the potential to hinder your ability to make mortgage repayments your lender will take this into account. The best thing you can do is work to gradually pay it off, and maximise your chances of getting a mortgage by improving your credit score.