Debt and getting a mortgage

At Lowell, we understand that being in debt can make things complicated, especially when it comes to your finances, and you might be concerned about the process of getting a mortgage loan to buy a property.

However, having debts doesn’t mean it’s impossible to get on the property ladder. That’s why we’ve created this guide where we’ll talk through:

What is a mortgage?

A mortgage is a loan from a financial institution that you use towards the cost of buying a property – it can also be referred to as a secured loan. To buy a house, usually at least 5% of the property’s price will need to be paid as a downpayment (a cash deposit), the rest of the money can then be borrowed through a mortgage.  

You’ll then pay back what you owe over a set period, typically a minimum of 25 years. This lengthy term is to help make the repayments manageable, given mortgages tend to involve borrowing larger amounts of money – the longer you have to pay it back, the less you pay per month.   

A mortgage is a secured loan which means the lender can take back (repossess) the property if you’re unable to make your monthly repayments. They would then sell the property to get their money back – sometimes this sale value is lower than what you owe meaning you would be left with a shortfall. This shortfall is still owed by you to the lender, and they would seek to recover this from you as a debt.   

Can you get a mortgage with debt?

Yes, you can still get a mortgage if you’ve got outstanding debt. If you’ve not yet cleared your other debts, you might be worried about applying for a mortgage. However, while it may be easier to get a mortgage once you’re debt-free, this doesn’t mean it’s impossible.

Lenders usually base their decision on your financial situation and history. This means that things like the amount and type of debt you have, how long you’ve had the debt, and the circumstances of your debt will all contribute to a decision – including also how reliable you are at repaying other debt.

How much debt can I have and still get a mortgage?

Your debt-to-income (DTI) ratio can be a good indicator as to whether your mortgage application might be approved. Used by mortgage providers during the application reviewing process, this looks at your estimated monthly debts compared to your monthly earnings.

A low DTI ratio indicates to a lender that you practice good financial discipline and don’t have a hard time balancing your debts with your income. Meanwhile, a high DTI ratio may appear to a lender as though you still have too much debt to pay off to keep up with mortgage payments as well.

How long after clearing debt can I get a mortgage?

There is no set timescale after clearing your debt before you can apply for a mortgage. However, if you’ve cleared debt to help support an application, it may be that you wait until your credit score improves - this may take a few months. In this time, you can also review your credit report, to check that nothing else could impact you getting a mortgage.

The best time to apply will be dependent on your own personal circumstances. There are mortgage professionals available to speak with to get a better understanding of what may be the best option for you.

What else can impact getting a mortgage?

Aside from having outstanding debt, there are other things that can impact getting a mortgage. This can include:

·       A low credit score – Once you apply for a mortgage, lenders will look at your credit file. If your credit rating has been impacted by a CCJ, missed payments or the event of bankruptcy, for example, this could impact your ability to take out a mortgage. However, this doesn’t mean it’s impossible and you can take the time to build up your score and then reapply. If you need help, we’ve got a useful blog on how to improve your credit score which includes some steps you can take.

·       Lack of credit history – Having no credit history can make getting a mortgage harder as lenders aren’t able to see how reliable you are.

·       How much you’re able to put down as a deposit – If you try borrowing too much money your application may be rejected. Levels of borrowing are based on affordability so the more disposable income (the difference between your income and outgoings) you have the better able you can demonstrate you can afford a mortgage payment. Some lenders may also limit the amount of borrowing based on annual income.

·       Mistakes on the application – There’s always the possibility of administration errors. So, if there’s a mistake on your application or credit file then this might result in your loan being rejected. Before submitting your mortgage application, it’s important to check that all the information provided is up-to-date and correct.

·       Your employment status – Not having regular payslips, because you’re unemployed or self-employed, can make it difficult to prove that you can afford to keep up with mortgage repayments.

·       Your eligibility to vote – If you’re not on the electoral register at your current address then it may take longer for lenders to verify your identity. This could slow down the process or may even mean your application gets rejected altogether.  

Is a mortgage a debt?

It’s also worth noting that your mortgage is considered a kind of debt. This is because even though it’s secured against a property, you’re still borrowing money. You’ll need to make monthly repayments which go towards clearing your total balance and any interest charged, as you would with any other debt.

What is mortgage debt?

Borrowing money to buy an asset that will increase in value over time may feel more secure than a credit card or loan however, entering a mortgage agreement is a big decision and commitment. You should plan ahead and be realistic about your financial situation and what you can afford.

You can seek advice from a mortgage adviser who will search what’s currently on the market and recommend the best deal for you and your individual circumstances. There may be a fee involved for using their service, but this depends on your adviser. You can get fee-free mortgage advice from the team at StepChange.

What happens if you miss mortgage repayments?

If you fall behind on your mortgage payments or have paid less per month than you should, you will be in ‘arrears’. Mortgage arrears can start to build up and your lender may take further action if you aren’t able to pay back what you owe, which could include contacting you more often to agree how you will repay the arrears. For more information, Citizens Advice has a handy guide on dealing with mortgage arrears.

Over on our debt guidance hub you can find even more guides on a range of debt-related topics along with how Lowell works together with customers on their journey to becoming debt-free with us.

First published: 26th July, 2023