When you apply for a mortgage, lenders consider your income and outgoings and compare this to how much you want to borrow.
This helps them work out just how much you can afford to pay towards your mortgage each month.
Any existing credit commitments – like loan repayments - can affect how much spare cash you have each month to make your mortgage payments. This is something lenders will certainly consider when deciding whether or not to lend to you.
But that’s not to say that having a loan will automatically mean your mortgage application is rejected. A lender may ask that you pay back your loan as part of the conditions of them giving you a mortgage – but they may not. It all comes down to what you can afford, how well you manage the credit you have and what you want to borrow.
Can your budget stretch?
As we said, just because you have a loan, it doesn’t mean you can’t get a mortgage. It’s simply a matter of what you can afford.
When you apply for a mortgage, your loan repayments will be included in your expenditure. If, once these are taken out, there’s not enough to cover a mortgage repayment as well, you may be turned down. But if there is money left for you to comfortably cover your mortgage, your application may be accepted.
Lenders will consider all your financial commitments including any existing loan, credit card or overdraft payments. Plus, anything from the cost of your utility bills to how much you spend on groceries, childcare and leisure/social activities will be counted.
Keep in mind that if you’re paying off an existing loan, this reduces the amount you can afford to pay each month towards your mortgage. Because of this, you may qualify for a smaller mortgage than if you paid off the balance of the loan before you applied.
For this reason, it’s worth paying off as much of your existing loan’s balance as possible before applying for a mortgage. Of course, how much this is will depend on your personal circumstances and the loan provider.
Before you up your loan repayments, check whether there’s an early repayment charge. If there is, carefully weigh up whether it’s worth clearing the loan before you start the mortgage application process.
Alternatively, if the term of your loan is due to end soon, delaying your mortgage application until you’ve made your final payment could be a suitable option.
By clearing the loan’s balance, you’ll have more cash in your budget to go towards your mortgage payments.
Thinking of applying for a loan?
Each lender will have a different mortgage application process. Ultimately, whether or not a loan will affect your application will be down to your situation and the lender’s unique criteria.
If you don’t have a loan but you do have plans to buy a house, it might be a good idea to hold off applying for a loan until you’ve got used to paying your mortgage. This way you will know whether you can realistically afford to commit to paying off a loan each month as well as keeping up with your mortgage payments.
However, if you plan on taking out a loan while applying for a mortgage, it’s vital you get to grips with your budget so you don’t take on more credit than you can afford. You might find it useful to use a loan calculator – like this one from Ocean – to give you an idea of what your mortgage payments might look like each month.
Check out our previous blog for information on what to expect when you apply for your mortgage and how to prepare for your interview.
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