Turned down for a mortgage because of your overdraft?

Outstanding overdrafts don’t have to be the end of your mortgage journey. If you’ve already been turned down, these Q&As ought to help you.

Lots of people have overdrafts and lots of people run into them on a regular or even permanent basis - but that doesn’t mean they’re all unable to get onto the property ladder. That’s because when it comes to overdrafts and mortgage applications, the make or break factor is often whether or not you’re frequently exceeding your limit.

In this blog, we’ll be answering some of the most common questions people ask when it comes to the world or mortgages and overdrafts.

What can you do to improve your chances of being accepted?

If you’ve already been turned down for a mortgage because of your overdraft and you want ways to get back in shape, here are a few simple steps to take:

1. Clear, or at the very least reduce, any outstanding overdraft credit;

2. Make sure you don’t exceed your overdraft limit;

3. Make sure you have at least three consecutive months’ worth of responsible-looking bank statements; and

4. Don’t ask your bank if you can increase your overdraft - it might make you look desperate to access cash.

Does an overdraft affect mortgage applications?

It depends on your own individual situation and what else you have on your credit report. The degree to which it's affected depends on whether your overdraft is authorised or unauthorised (also sometimes referred to as arranged and un-arranged) - an authorised overdraft is one your bank has agreed you can use, and an unauthorised overdraft is one they haven’t signed off. You're likely to be impacted more if you go into an unauthorised overdraft.

Does an overdraft count as debt?

Yes, it does. Overdrafts are usually attached to current accounts and they allow you to spend more money than you have at your disposal. So, you’re lending money from your bank, which means you’re in their debt.

If you’re planning on going into your overdraft, as with any type of credit, you should only do so if you’re confident in your ability to pay it back. If you’re charged interest on your overdraft and you leave it hanging over your head for too long, it can soon become a very expensive way to borrow.

Does being in your overdraft affect credit score?

This goes back to whether the overdraft is authorised or unauthorised. If it’s an authorised overdraft, providing you stay within the limit set by your bank, although it will show on your credit report it shouldn’t affect your credit score.

As we touched on earlier, dipping into an unauthorised overdraft will also show on your credit report, but this time it will impact your score. This is because you’ll have a track record of spending without permission - which, understandably, doesn’t leave a good impression to future lenders.

On top of that, if you fail to repay what you’ve spent in your overdraft your debt could be passed on to a debt collection agency, which will harm your credit report further - and for longer (seven years to be precise).

Can you use your mortgage to pay for your deposit?

You can’t use your mortgage to contribute to a deposit for another mortgage. When you take out a mortgage, the sum you borrow pays off your property, and then you repay your lender in monthly instalments - you don’t actually have the money in an account to withdraw or transfer.

If you already have a mortgage to your name and the value of your property’s gone up, what you could do though, is remortgage. That way, you could use the money you make from remortgaging to put towards another deposit.

Do mortgage lenders look at your bank statement?

Yes, most lenders will ask to see your bank statements when you apply for a mortgage. There are a few reasons they request this:

1. They want to confirm you have the funds to cover your deposit.

2. They want to check the money you’re using for a deposit is actually yours - i.e. not a loan. Generally speaking, mortgage lenders discourage borrowers from lending money to help access another loan, because it can lead to an unmanageable spiral of debt.

3. They want to see where and how you spend money. Regular spending at the bookies or frequently going into your overdraft, for example, could be cause for concern as it hints at an inability to manage money effectively.

How many months’ bank statements do you need?

You’ll be asked to provide three to six months’ worth of current account statements. If you’re self-employed you’ll be asked for two to three years’ worth of accounts from an accountant.