Can your overdraft stop you getting a mortgage?

Getting a mortgage can be tricky if you regularly use your overdraft. Banks look closely at how you handle money before saying yes to a home loan.

In this article, we'll explain how your overdraft habits could affect your mortgage dreams and what you can do about it.

What is an overdraft?

An overdraft is a banking feature that allows you to continue spending even when your account balance reaches zero. There are two main types:

• An authorised overdraft means your bank has agreed to let you borrow a certain amount - they've given you permission to go into the red up to a specific limit.
• An unauthorised overdraft happens when you spend more than you have without the bank's permission, or when you go over your authorised limit. Banks charge much higher fees for unauthorised overdrafts, and they can harm your credit score.

How much do overdrafts cost?

With an authorised overdraft, you usually pay interest on the amount you borrow - think of it like rent for using the bank's money. Some banks charge daily or monthly fees instead of interest. The typical rate is around 40% APR.

Unauthorised overdrafts cost even more, with extra penalty fees that can add up quickly. Some banks might charge £5-£10 each day you remain overdrawn without permission.

Banks must tell you clearly about these charges, and they now have to send alerts when you're getting close to your limit. It's smart to check your overdraft terms carefully and set up text alerts to avoid any surprise fees.

Does an overdraft affect my mortgage application?

It depends on your situation and what else appears on your credit report. An authorised overdraft causes fewer problems than an unauthorised overdraft.

Going into an unauthorised overdraft makes lenders worry about lending you money for big purchases… like a home.

Is an overdraft considered debt?

Yes. Overdrafts let you spend more money than you have in your account. You're borrowing from your bank, so you owe them money.

Only use your overdraft if you know you can pay it back. If you pay interest on it and leave it unpaid for too long, it becomes a very expensive way to borrow money.

Does being in my overdraft hurt my credit score?

For authorised overdrafts, if you stay within your limit, it will show on your credit report but shouldn't hurt your credit score.

Going into an unauthorised overdraft will show on your credit report and damage your score. This happens because you spent money without permission - which makes future lenders nervous about lending to you.

⚠️ If you don't repay your overdraft, the bank might send your debt to a collection agency. This harms your credit report even more and stays there for six years.

Do mortgage lenders look at my bank statements?

Yes. Most lenders will ask to see your bank statements when you apply. They do this to:

1. Check you have enough money for your deposit
2. Make sure the deposit money is really yours (not borrowed)
3. See how you spend your money. Regular gambling or always being in your overdraft can worry lenders because it suggests you might struggle to manage money well.

How many months of bank statements do I need?

Lenders usually ask for three to six months of current account statements. If you're self-employed, they'll want two to three years of accounts from an accountant.

How can I improve my chances of getting approved?

If a lender has already said no because of your overdraft, try these simple steps:

1. Try to pay off your overdraft, or at least reduce it
2. Never go over your overdraft limit
3. Don't ask for a bigger overdraft - it makes you look like you need more money.
4. Hold off reapplying for a few months until your accounts are in a healthier state - multiple applications in a short period of time can harm your credit score further
5. Show at least three months of good money management on your bank statements.