How does car finance affect a mortgage?

As with any form of credit, car finance can affect a mortgage when it comes to approval or affordability. Buying a house and applying for a mortgage is one of the biggest financial decisions you can make in your lifetime. If you’re preparing to make an application, it makes sense for you to understand the different factors that might affect your chances of being approved, including car finance.

If you’ve missed any car finance payments in the past or have a poor credit score, you might find it difficult to qualify for a mortgage. It may also be worth keeping in mind that a large outstanding car finance balance could affect your affordability, restricting the amount you’re able to borrow. However, if your credit history is good and you can comfortably afford your monthly repayments, there’s no reason why your car loan should prevent you from securing a mortgage.

9 min read
Toy cars alongside a house

How does car finance affect your credit score?

The good news is that getting an initial car finance quote shouldn’t affect your credit score. Lenders will typically run a soft credit check to find out whether they can offer you an approval in principle. Soft credit checks won’t be visible to other lenders or affect your credit score.

It’s only when you accept that quote and proceed with an application that a hard credit check will take place.

Most hard credit checks are recorded on your credit report for up to 12 months. Having several checks within a short time may affect your credit score. Once you’ve signed your agreement, car finance will also be added to your report, and this may cause a temporary dip in your score as it is a large new debt.

If you keep up with your car finance repayments, your score should recover – you may even boost it if you can demonstrate that you’re a reliable borrower over time. In contrast, if you struggle to make your repayments and fall behind, your credit score may take a hit, which could affect your ability to secure a mortgage in the future.

What’s the difference between a hard and soft credit check?

When you make an application for car finance with Ocean, a soft credit check will be performed. This allows our lending panel to view your credit report, but it won’t affect your score. Soft credit checks won’t be visible to any future lenders checking your file and you can undergo several soft checks a year without them having any effect on your credit score. A hard check or search will take place only when you choose to proceed with your car finance application.

Hard checks are visible to other lenders and can stay on your credit report for up to 12 months. It’s good practice not to have too many hard credit checks carried out in a short amount of time, as this can indicate to potential lenders that you’re relying too heavily on credit.

Will car finance affect my mortgage affordability?

Your car finance repayment may be your second largest monthly financial commitment after your mortgage. This payment will also be considered in your mortgage affordability checks and contribute to your debt-to-income ratio.

Affordability checks are in place to make sure that you’ll be able to keep up with your mortgage payments and still have enough money left over to enjoy a good quality of life. Mortgage lenders will look at your typical monthly income and outgoings to determine how much disposable income you have available. If your current car finance payments are high, this can reduce the amount of money you have left over to put toward your mortgage.

If this strikes a chord with you, you may want to look at settling your finance early if you can. This could improve your mortgage affordability, as you’ll no longer have a large monthly car loan payment reducing your disposal income.

Can I get a low-income mortgage during my car finance loan?

Low-income mortgages are typically offered to applicants who don’t have a large amount of disposable income available. Having a low income can make it more difficult to secure a loan, as you may have trouble passing mortgage affordability checks and could be perceived as a higher-risk borrower.

If you have a low income and are currently in a car finance agreement, it may be hard to qualify for a mortgage, as the lender could be concerned that you’re trying to push beyond your financial limits and would be in danger of defaulting on both loans if you were approved. Mortgages and car finance can both come with high repayments, so you might want to look at settling or ending your car loan early before making an application for a low-income mortgage. 

How can I clear my car finance balance before applying for a mortgage?

With a hire purchase (HP) or personal contract purchase (PCP) finance agreement, the loan will be secured against your car, and you won’t be its legal owner until you reach the end of your term and have made all your repayments (and paid the balloon payment in a PCP). To end your car finance early, you can choose to settle the loan and take ownership of the car. 

A settlement figure is the amount you’ll need to pay to end your car finance agreement early. This will normally be made up of your outstanding finance minus any interest. Early repayment charges may also apply. If you have the funds available in your savings to cover the settlement figure straight away, you can simply pay the amount and become the car’s legal owner.

If you can’t afford to pay the settlement figure, you have the right to give the car back to the lender and voluntarily terminate your car finance agreement under Section 99 of the Consumer Credit Act 1974. You’ll only qualify for voluntary termination once you’ve paid 50% of the total finance amount. This shouldn’t be confused with 50% of your car’s value or scheduled repayments; instead, it includes any fees and interest - as well as the balloon payment if you have a PCP agreement. If you’ve not yet reached this threshold, you can choose to pay the difference to make up the required amount.

Should I refinance my car finance before applying for a mortgage?

Refinancing a car can allow you to change the terms of your finance agreement before it is settled. If you’re concerned about your mortgage affordability check or debt-to-income ratio, you might consider refinancing to a loan with a longer term and lower monthly repayments. You may even be able to qualify for a lower interest rate if your credit score has improved over time.

Keep in mind that refinancing will involve a hard credit check, which will be listed on your report. As hard credit checks and new car finance loans (even refinance loans) can affect your credit score, you may want to consider making your mortgage application several months later to ensure there’s a gap.

Can I apply for car finance and a mortgage at the same time?

Sometimes, we experience a lot of change in a short time. You might feel ready to buy a home, have found your dream place, and are preparing to apply for your mortgage when your car breaks down or your finance agreement comes to an end. If you need a new car, you might be tempted to apply for car finance and a mortgage at the same time. While there are no rules against this, it is sensible to consider what’s the best option for you given your financial circumstances.

Each time you make a new application for credit, a hard credit check will be carried out. These checks are listed on your credit report and will be visible to other lenders. Having several hard credit checks in a short period of time can lead lenders to worry that you’re relying on credit. This may mean that your mortgage or car finance application is rejected. If you can leave time (i.e., months) between each new credit application, you may improve your chances of being approved. 

How can I protect my finances during my car finance agreement?

Car finance can have many advantages, especially if you don’t have the savings available to buy a car outright, would like to buy a newer model, or don’t want to own your car long-term. However, there are steps you can consider to minimise the impact of your car loan on the rest of your finances:

  • Choose a cheaper car

Buying an older used car or choosing a less desirable model could offer a better deal and mean you can borrow less or opt for a shorter loan term.

  • Borrow within your means

While it might be tempting to push the limits of your budget to buy the car of your dreams, considering your affordability and choosing a vehicle that you can comfortably afford could leave you with more disposable income.

  • Choose the right car finance agreement

Every car finance agreement is tailored to the borrower’s individual circumstances, but you can shop around to get the best deal (if no hard searches take place). Consider looking at the total amount payable, the terms and conditions, fees, and APR before making a final decision. 

  • Make payments on time

If you can make your car finance payments on time each month, you’ll demonstrate to the lender that you can be a responsible borrower. This may help to improve your credit score over time and could make it easier to secure a loan in the future.

How can I improve my credit score?

The good news is that credit scores aren’t fixed, and you can take steps to improve them over time. It’s not an exact science and there’s no set score that will guarantee you’ll be approved for car finance or a mortgage, but following the guidelines below may help:

  • Register on the electoral rollhead online to register for free every time you move house.

  • Pay your bills on time – consider setting up a direct debit after payday to reduce the chance of paying late.

  • Check for mistakes on your credit report – regularly looking at your credit report can help you spot unusual activity or incorrect details. You can check your score for free with CredAbility.

  • Don’t use all your available credit – using a smaller percentage of your total available credit (by not maxing out your credit cards, for example) could boost your score.

  • Don’t apply to several lenders at once – several hard credit searches in a short time could harm your score.

  • Check your financial links – joint credit cards or mortgages could mean someone else’s credit profile is negatively affecting yours.

Get Car Finance up to £100,000

  • Check your eligibility without impacting your credit score
  • No deposit needed
  • Rates from 9.9%* APR
Get a deal

*Representative example: Borrowing £6,500 over 5 years with a representative APR of 19.9%, an annual interest rate of 19.9% (Fixed) and a deposit of £0.00, the amount payable would be £166.07 per month, with a total cost of credit of £3,464.37 and a total amount payable of £9,964.37. Rates may differ as they are dependent on individual circumstances. Subject to status. We're a credit broker, not a lender.

Disclaimer: All information and links are correct at the time of publishing.