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    How Does Credit Card Debt Affect Getting a Mortgage?

    By The reallymoving Team Updated 21st May, 2024

    If you’re going to need a mortgage to buy your property, your debts should be the first thing you think about.

    How Does Credit Card Debt Affect Getting a Mortgage?

    Credit card debt is common –research done by money.co.uk  found that the average credit card balance in the UK is £1,675 with 64% of adults in the UK owning at least one credit card. No matter how common it is, you might be worried about how credit card debt will affect your ability to get approved for a mortgage. 

    What counts as credit card debt?

    Credit card debt is the outstanding balance on a credit card that is carried over each month. Credit card debt can build up if you open multiple credit cards. Credit cards can be useful for spreading out a cost over time, but it is important to be aware of the high interest rates and keep on top of repayments.

    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 will be 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. Generally, the lower the number the better your chances. 

    What role does credit card debt play in a mortgage application?

    For credit card debt, most mortgage lenders will assume you’re paying back between 3% and 5% of the debt each month. 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. 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. 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. 

    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.

    Getting a mortgage with credit card debt FAQs

    Should you close credit cards before applying for a mortgage?

    You don’t necessarily need to close your credit cards before applying for a mortgage. Lenders will want to see that you have the means and realistic plans for paying off any debt on your credit card, but it can negatively impact your credit score to close off credit cards.

    How much credit card debt is too much for a mortgage?

    There is no set amount that lenders will consider too much credit card debt for you to have. They will instead look at your debt to income ratio to be sure that you will be able to comfortable afford both your repayments of your debts and your mortgage.

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