How do loans stop you getting a mortgage?
How do loans stop you getting a mortgage is a more detailed subject than it may first appear. As a consumer you are often encouraged to take out loans to fund cars, PCs, TVs, study and furniture but often loans stop you getting a mortgage so if this is in your plans then you need to read on to find out the impact.
How loans stop you getting a mortgage may come down to a variety of factors such as reason and timing; income and affordability; size of the loan; and past credit conduct and we explore each of these in turn below.
Reason and timing
Loans stop you getting a mortgage if they are taken out shortly before the mortgage application when the Mortgage Lender suspects they are for the use of the deposit. Why would a Mortgage Lender take this stance? Well it comes down to how they interrupt the risk to them. Their Underwriting is based on a formula called “loan-to-value (LTV)”. This is simply the relationship between the mortgage amount and the property value, expressed in percentage terms. For example, a mortgage of £90,000 taken on a purchase at £100,000 is a 90%LTV. The higher the percentage the greater the risk to the Mortgage Lender as you are putting in less of your own money.
To elaborate if the loan was now 50%LTV, you’d have a £50,000 stake in the deal rather than the original £10,000 so there is a greater incentive for you to keep up with the repayments as if the property was repossessed you personally stand to lose more. If you part of the bargain was in fact funded by a loan elsewhere then the percentage you have at stake goes away again and the risk returns.
Loans stopping you getting a mortgage may be watered down if the individual loans have less than 6 months to run as the Mortgage Lender might see this as little consequence in relation to their debt is likely to last 20 to 30 years.
If the reason for the debt is a student loan then the Mortgage Lender will know that repayment is only effective when you earn a certain amount, and if you are under this threshold they are unlikely to be factored in.
Second charge loans stopping you getting a mortgage is a common one. There are a number of Mortgage Lenders that want themselves to be the only lender that has claim to the property in the event of default.
Income and affordability
Money is often the answer to many problems and directly impacts the ability for loans stopping you getting a mortgage. High earners are often seen by Mortgage Lenders as the better customers who should have a greater disposable income and therefore room to service loans.
Most Mortgage Lenders will factor in the costs of a loan even if the customer promises to repay it by Completion when the mortgage takes effect. Probably because data has shown that these promises have not been kept by others in the past. Your professional Mortgage Broker, such as Niche Advice, can help steer you towards the few Mortgage Lenders that take the opposite approach.
Size of the loan
The larger the monthly payments the greater the impact shows on how the loans “loans stopping you getting a mortgage” concept works. It also demonstrates that modest loans might not affect the overall borrowing ability at all. Remember that the difference means you will need to put in a larger deposit when that money could have perhaps been spent on recordation of your new home or indeed the need to lower your sights to a flat rather than a house.
The table below is based on NatWest loan to value is 85%. A married couple with 2 children. She earns £30,000 and he earns £15,000. The mortgage is repayment over 25 years. Apart from loans they have no other debts. All the loans have more than 6 months to run. Figures taken for their Intermediary website 9/5/2020.
Past credit conduct
If conducted poorly it could be your loans stopping you getting a mortgage. Yes, a Mortgage is a large commitment and your track record on all personal finance and including loans will be looked at. The older the problems the better your chances; also if the loan is personal one rather than secured against property. There are a number of Mortgage Lenders that will be more accommodating but typically these can only be accessed via professional Mortgage Brokers such as Niche Advice.
In the last few weeks Mortgage Lenders have also increased their scrutiny on customers who have agreed “payment breaks” with their loan providers due to the health crisis, and questioned whether this is the right time for them to be take on a mortgage.
So you can see “loans stopping you getting a mortgage” is a broad theme and if you have loans and are looking for a mortgage you’d be well advised to seek out a mortgage professional.