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How existing debts can affect mortgage affordability, and the risks to consider before remortgaging to repay them.
What is classed as a debt for mortgage purposes?
A mortgage lender classifies debt as any money that you owe to another party, such as:
- Personal loan debt
- Credit card debt
- Store card debt
- Catalogue debt or Buy-Now-Pay-Later debt
- Bill or rent arrears
- Student loans
- Court fines
Does debt matter when getting a mortgage?
Yes, the amount of existing debt you have is considered by mortgage lenders when they assess your mortgage application.
The good news is that you can still get a mortgage with existing debt. A mortgage application considers more than just debt.
How does personal debt affect a mortgage?
Personal debts affect your debt-to-income ratio, which is the amount of money you have to pay out for existing debts against the amount of money you earn.
Thus, debts reduce your disposable monthly income and could therefore reduce your mortgage borrowing power, i.e. how much the mortgage lender is willing to loan you. If your debts are too high, you could be rejected for a mortgage.
Why do mortgage lenders care about your mortgage repayments?
Mortgage lenders care about how much your monthly mortgage repayments will be because the lender has a responsibility to make sure your mortgage repayments are affordable for you.
To ensure mortgage repayments are affordable, they must consider existing debts and the repayments you make on those debts.
Lenders also “stress test” these repayment calculations to make sure you can still afford the mortgage should the interest rate rise in the future.
Understand your debt options
MoneyNerd can introduce you to The Debt Advice Service for free debt advice. MoneyNerd does not provide debt advice or recommend debt solutions.
The Debt Advice Service can explain your options, including their benefits, costs and risks. Options available depend on your circumstances. There’s no obligation to take a debt solution.
MoneyNerd does not provide debt advice. We may introduce you to The Debt Advice Service, a trading style of Pacific Financial Solutions Limited, which can provide information about debt solutions and your available options. Fees may be payable if you enter into a formal debt solution. MoneyNerd Limited may receive a referral fee. Entering into a debt solution may affect your credit rating. Free debt guidance is available from MoneyHelper at moneyhelper.org.uk.
Do mortgage lenders care about payday loans?
Yes, mortgage lenders do want to know about any payday loan you have still to repay. These debts will be considered within the debt-to-income ratio.
Do mortgage lenders care about credit card debt?
Yes, credit card debt is considered by mortgage lenders. The amount of debt you have on existing credit cards will need to be factored into affordability checks.
But try not to panic as many people get a mortgage or remortgage with an existing credit card. We discuss remortgaging with debt in further detail towards the end of this page.
Does the amount of credit I use matter to mortgage lenders?
Credit card debts are less likely to negatively affect a mortgage application if you have a low credit utilisation ratio.
First, what’s a credit utilisation ratio? It’s the amount of credit you’ve used on your credit card compared to how much credit you’ve been approved for on the credit card (your credit limit). If you have a high credit utilisation ratio, it means you have spent a lot of the credit you’ve been approved for.
Your credit card debt is less likely to be a problem on a mortgage application if your credit utilisation is 30% or less. Although we should state that many other factors contribute to a mortgage decision.
For example, if you have been approved for £1,000 of credit on the card but have only used £200 (20% credit utilisation), this will typically be less of an issue. Learn more in this guide discussing credit cards and mortgages.
Why? It’s because it shows you aren’t relying on credit and might be using the card for other benefits, such as to improve your credit rating or gain loyalty points on a scheme.
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Can you get a mortgage with outstanding debt?
The key takeaway is that you can get a mortgage with outstanding debts. Scores of people get approved for a mortgage with debts still to pay, but it will depend on your specific circumstances.
You’re less likely to get approved if you’ve had multiple debts and arrears that led to a court order to make you pay. Or if you used an insolvency debt solution to start afresh from debt.
But even in these situations, there is still potential to clear debts and get a mortgage after rebuilding your credit report.
How much debt is OK for a mortgage?
There is no universal debt-to-income percentage that guarantees a UK mortgage. Lenders assess income, committed spending, dependants, deposit, credit history and their own affordability criteria. Ask a regulated mortgage adviser how existing commitments affect the options available to you.
How much mortgage can I borrow if I have debt?
The amount you can borrow on a mortgage will be reduced if you have debt. This is because some of your income is required to keep up with these debt repayments. How debt affects your borrowing power will depend on personal circumstances, such as your income.
There are other things that can also affect your borrowing power, such as how many children you have, and don’t forget about any student loan repayments!
Is it better to pay your debts off before applying for a mortgage?
Reducing debt may improve affordability, but it also uses money that might be needed for the deposit, fees and emergencies. There is no universal deposit percentage that secures the best deal. Consider the full budget and any repayment charges with a regulated mortgage adviser before deciding.
How long after paying off debt can you apply for a mortgage?
Because you can still be approved for a mortgage with debt, there’s no time restriction on applying for a mortgage after paying off debt. But you might want to wait to ensure your credit report has been updated.
There could be an exception to the above, especially if you have recently used an insolvency solution like bankruptcy or a Debt Relief Order (DRO).
Can you remortgage if you have debt?
It may be possible, subject to the lender’s affordability and credit checks. Borrowing more against the home to repay unsecured debt turns that debt into secured borrowing: your home could be repossessed if payments are missed.
A lower monthly payment can still mean more interest over a longer term. Compare the total repayment, fees and early-repayment charges and seek free debt advice before consolidating debts. See MoneyHelper’s consolidation guidance.
What stops you getting a remortgage?
You can be stopped from remortgaging due to:
- Too much existing debt
- A very bad credit score
- Negative home equity – this is when the value of your home has decreased, leaving the mortgage bigger than the property’s value
- Other preventive factors, such as high early repayment charges on the initial mortgage or failing to meet qualifying criteria
Take the first step towards tackling your debt
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Natasha
Very helpful and informative thank you
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The Debt Advice Service is a trading style of Pacific Financial Solutions Limited.
For free, impartial help and access to not-for-profit debt advice, visit MoneyHelper.
Do you have a credit check when remortgaging?
Yes, remortgaging is an application for new credit and therefore includes a hard search of your credit report and an analysis of your credit score.
What should you not do before remortgaging?
If you plan on remortgaging soon, try not to spend erratically, apply for new credit or miss existing debt repayments.
What is a bad credit mortgage?
A bad credit mortgage is a mortgage deal that is aimed at people with poor credit but wanting a mortgage.
Bad credit mortgages are usually advertised by online mortgage providers. They may not have the most competitive interest rates, but you may be more likely to get approved for one of these if you have especially bad credit.
It’s worth speaking with a good mortgage broker to work out if this is the right option for you. Some mortgage brokers are fee-free, so you won’t pay to learn the best option. You might even find a mortgage broker who specialises in helping people with poor credit.
Bad credit mortgage calculator
A calculator gives an illustration, not a mortgage offer or acceptance decision. Check which interest rate, fees and term it assumes. A mortgage illustration should show the product terms and APRC; do not apply a consumer-credit representative-APR rule to predict the rate a mortgage lender must offer you.
Need more help with mortgage debt or other debts?
Worried about debt? Get help dealing with your credit card debt, other debt and arrears on the MoneyNerd debt information guide. It’s worth consulting this guide before you start applying for a mortgage.
