Does a Payday Loan Affect You Getting a Mortgage?
The answer is no.
Many people are concerned with the ongoing debate of whether simply having a payday loan on your credit record can impact your chances of being approved for a mortgage.
The truth is that mortgage lenders and brokers treat a payday loan as if it were any other loan, whether it is car finance, personal loan or guarantor loan.
Payday Loans Do Not Affect You Getting Approved For a Mortgage
The background of the dilemma comes as payday loan products are generally considered to be for those in desperate need of funds. They cannot wait until their payday from work at the end of the month, so literally need a small amount of just a few hundred pounds to tide them over.
Several fear that simply having it on their credit record, which keeps loan records for at least 6 years, may be detrimental. It also comes after it was announced that around 43% of millennials rely on these high cost forms of credit to get by or fuel their lifestyles.
How Mortgage Brokers and Lenders View It
The reality is that most lenders in the mortgage space treat this type of finance as any other. (Source: This is Money)
It is less about taking out the loan, what’s important is whether or not your paid it back. If someone is applying for a mortgage, there are additional costs involved with running a house such as insurance, water, electricity and other utility bills. So what mortgage brokers and lenders want to see is a candidate that has repaid their loans successfully on time. Plus, they want to ensure that you are reliant on payday loans to get by every month because this would suggest financial vulnerability.
For young people in particular that instantly get a credit score when they turn 18, they will want to show proof of affordability and an indication of their creditworthiness. Therefore, proving that you can repay loans on time is a good start to getting up that property ladder.
James from Experian, the credit reference agency, explains:
Just make sure you continue to manage all of your credit commitments sensibly and, importantly, you refrain from applying for any other credit in the months leading up to your mortgage application. And if the lender agrees with you that you can afford whatever loan you are requesting then your application should get a green light.
Can I Use a Payday Loan To Boost My Credit Rating?
Surely if repaying loans and lines of credit on time can help my credit score, why don’t I just take out a payday loan to help boost my score?
No, this is considered irresponsible and mortgage advisors will clock onto this. They will see that you are using high-cost credit when you do not need it – so why put yourself at risk? For the very least, why pay a high cost loan with over 1,000% APR when a credit card has a 0% introductory bonus and can do the exact same thing?
What Can Affect Your Chances of Being Approved For a Mortgage?
- Not paying loans and credit cards on time: This will have a negative impact on your credit rating and jeopardise your ability to access a mortgage. The worse your credit score, the more risky you appear to the lender. So the worse and worse you go, the higher your interest rates and less you can borrow, until eventually you are not approved.
- Being too young: You must be 18 to be eligible for a mortgage and sometimes young people simply do not have enough of a credit history or employment history to give lenders the confidence to back you with a mortgage. This suggests that young people would benefit from getting some longer term employment under their belts and also using things like credit cards, specifically so that they can repay on time and build up their credit history a bit.
- Linked accounts: Being linked to someone like a spouse or sibling with an extremely poor credit history may also put your application at risk. This is not simply knowing or being related to them but actually sharing a mortgage or a joint account may.
- Affordability: A mortgage lender will not lend to you if they believe you cannot afford it. So they will take your credit history, income and future expenses into consideration and if they conclude that you cannot afford it – you will not be successful in your application.
What Can Improve Your Chances of Being Granted a Mortgage?
- Good credit history: Naturally a strong history or repaying other loans and credit on time and for several years demonstrates that you are low-risk person to lend to and can be trusted.
- Affordability: As mentioned above, it is all about whether you can ‘afford’ a house loan. So having savings and a stable credit rating is one thing but also essential is a good employment status. Have you worked somewhere for several years? Is your job secure? These things contribute to the final decision and give lenders confidence when reviewing your application.
- Already having a mortgage: If you have had a previous mortgage, you have repaid that successfully for many years, you have a proven track record. There may be less flexibility with getting a second mortgage or indeed a second charge mortgage on a property, but again, this comes down to affordability.
- Having a guarantor: Yes, its all about the guarantor on this website. Having an extra, experienced person to co-sign your mortgage agreement can vastly increase your chances of approval. So confident are mortgage lenders, that they are willing to offer 100% LTV for those with a suitable guarantor. This is especially useful for young people looking to get on the ladder. It helps if the guarantor is a homeowner at the moment and can afford the monthly mortgage repayments without even taking their current security and assets into consideration.