Updated: February 21, 2022

Getting a Mortgage While Still Paying off a Loan

Worried about a personal loan affecting your mortgage application? Your mortgage or remortgage doesn't have to be affected; our guide walks you through it all!

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No impact on your credit score

Pete Mugleston

Author: Pete Mugleston - Mortgage Expert

Updated: February 21, 2022

If you’ve got a loan and are looking to get onto the property ladder, you may have one question on your mind: does having a loan affect a mortgage application? Unfortunately loans and mortgages don’t always work well together, which means there may be some conflict involved.

But it isn’t always that clear-cut, so if you’re thinking of taking the plunge, here’s everything you need to know about getting a mortgage while still paying off a loan.

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Can you get a mortgage if you have a loan?

Yes, you should still be able to get a mortgage if you have a loan – though be prepared to jump through a few more hoops to prove you can afford it. This is because lenders will closely assess your affordability to determine how much additional debt you can afford to take on, and if you’ve already got a loan or two, you may find it more difficult to be approved, especially if the loan was taken out recently.

However, all lenders will assess your application differently and may have different criteria when it comes to personal loans. An experienced broker will know the lenders most likely to accept applications from those with current debt, reducing the possibility of a rejection.

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How much will it affect my application?

This depends both on the type of loan in question and when you applied for it, as well as your current debt burden. Here’s a few of the key factors that could influence the outcome of your mortgage application along with an explanation why:

Timing

If you’ve had a loan for more than six months and are comfortably making the repayments, it shouldn’t have too much of an impact on your mortgage application, provided you can prove you can afford the additional repayments of a mortgage.

This is particularly the case if your loan is due to be repaid within a few months of your mortgage application, in which case some lenders will disregard it entirely.

However, if you’ve applied for a loan more recently than that – particularly in the last three months – it will leave a mark on your credit report and could mean you’re rejected for the mortgage, as needing to seek a loan may indicate that you’re financially struggling. Several applications in a short space of time will be an even bigger red flag for a lender.

Types of loan

The type of loan you have can also determine the impact on your mortgage application. A standard personal loan or car finance agreement should have little bearing on it, provided you manage them effectively, and the same applies to things like credit cards and other forms of revolving credit.

Yet there’s one type of loan that almost guarantees a rejection: payday loans. These short-term, high-cost forms of credit indicate that the borrower is truly struggling, and for that reason many lenders will automatically reject applications from those who’ve had a payday loan in the previous 12 months – and some will look back as far as six years. First-time buyers are likely to be viewed particularly harshly in this regard.

There are exceptions, of course. Some lenders will consider applicants with a payday loan on their file, though they’ll need a high credit score with no evidence of other financial difficulties. It’s always on a case-by-case basis.

DTI ratio

Mortgage lenders use a calculation method known as the debt-to-income (DTI) ratio to help determine affordability, where your existing debts are viewed as a percentage of your monthly income. The calculation is as follows:

  • Total monthly debt repayments ÷ Total monthly gross income x 100

So for example, if your monthly debt repayments total £200 and you earn £2,000 per month, your DTI ratio would be 10% (200 ÷ 2000 x 100 = 10).

A DTI ratio of below 30% is considered low risk with a good chance of being accepted, with lenders becoming more cautious from then on (bear in mind that your potential mortgage repayments will be factored into this calculation too). If a substantial amount of your income is already servicing debt and you can’t afford to repay it in advance, be prepared for a trickier time when applying for a mortgage.

How to improve your eligibility

If you’re looking to get a mortgage, but concerned your current personal loan commitments could prove prohibitive, here’s a few simple tips to help boost your chances:

Reduce your loan balance and Debt to Income Ratio

Naturally, by reducing your outstanding loan commitments you’ll simultaneously improve your overall DTI ratio. Subsequently this will be looked upon much more favourably by a lender when they review your application.

Check your credit reports

It’s important to check your credit reports before you apply for a mortgage, both to make sure that your score is in good standing and to check for any errors, so there’s time to improve your file if necessary.

A higher credit score means it’s more likely that you’ll be approved for a mortgage, with those who have bad credit finding it more difficult. It isn’t just about being approved or rejected outright either; a better credit score can lead to lower mortgage rates, so checking it ahead of time can really pay off.

You can download your credit reports right now by clicking on the link here and following the instructions.

Speak to an experienced mortgage broker

A broker will be able to search the whole of the market to find a mortgage lender who’s likely to accept your application, even if you have a loan you’re still paying off. This can be particularly useful if you have a high DTI ratio and, as a result, may find it more difficult to source a suitable mortgage alone.

Having someone on-hand who knows the criteria of individual lenders can reduce the possibility of a rejection and any further black marks on your credit score.

If you get in touch we can arrange for an advisor we work with to contact you directly and discuss your situation in more detail.

Adding a personal loan to a mortgage

In theory, adding a personal loan to a mortgage is possible. You may want to do this as a form of debt consolidation, with the initial appeal being that the interest rate on a mortgage will often be far lower than on other types of loan and your overall monthly debt payments will be lower.

However, this will increase the amount you have to borrow on your mortgage, which can have long-term consequences. An additional £5,000, for example, may not seem like a lot, but if you’re paying it off over 30 years or so, it could end up costing you far more in interest than if you kept with a standard loan.

It will also lead to a higher loan-to-value ratio, which will have a knock-on effect on the interest rate you’re offered and again could end up costing you more. It’s important to speak to an advisor if you’re considering going down this route to make sure it’s the right option.

How soon after buying a house can I get a personal loan?

Best advice would be to probably hold off from applying for any new lines of borrowing for a few months if you can, as too many applications in a short space of time can have a negative impact upon your overall credit score.

Once your mortgage has completed and you’re in your new home, it’s only natural for your thoughts to turn to refurbishing it, and that may mean you’re considering a personal loan to fund the project.

The fact that you’ve already been approved for a mortgage should work in your favour as far as your credit score is concerned, but it’s just best to hang fire for a couple of months before applying.

Remortgaging with personal loans

If you’re looking to remortgage and you’ve still got a personal loan you’re paying off, the same rules apply as if you’re applying for a mortgage outright – you’ll be expected to prove that you can afford the repayments of your new mortgage alongside your loan. However, the advantage is that you’ll already be able to show a successful history of doing just that, and if you’re remortgaging to a lower rate and/or a lower LTV your repayments could even reduce, which will give your affordability profile another boost.

Find a broker experienced in loans and mortgages

Knowing whether or not a loan will affect your mortgage application isn’t always easy, so you’ll need to find a broker who’s experienced in this field. That’s where Online Money Advisor can come in.

We’ll match you with an expert broker who knows the lenders who are most likely to accept an applicant with loans on their credit profile, helping you find a mortgage that suits your needs and budget. There’s no fee for the introduction and no obligation, just the chance to find the deal that’s perfect for you. Make an enquiry or call us on 0808 189 0463 today.

FAQs

Can I use a loan as my deposit?

In the vast majority of cases, no, you won’t be able to use a personal loan for your deposit, with most lenders requiring it to come from an alternative source. However, there are a few exceptions. Santander and Saffron Building Society, for example, may accept deposits that have come from a loan, but you may be subject to more stringent affordability criteria and you’ll have to apply via a broker.

Can a personal loan improve my eligibility?

Although a personal loan can sometimes lower your eligibility – particularly if you apply for one right before your mortgage application, or if you’re struggling to meet the repayments – in some scenarios it can actually boost your standing in the eyes of the lender. This is because lenders look favourably on those who can effectively manage their credit commitments, so if you’ve got a loan that you’ve been comfortably paying off for many months or even a few years – and crucially, you’ve never missed a repayment –  you’ll be viewed as a lower credit risk and could see a boost to your credit score as a result.

What if I’ve had payment support during the pandemic?

If you’ve struggled to repay your loan and have taken advantage of any coronavirus-related payment support (such as payment deferrals, reduced payments or waived interest), it will likely show on your credit report and could have an impact on your mortgage application. If this is the case you should speak to a mortgage broker who can advise.

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Pete Mugleston

Pete Mugleston

Mortgage Expert

About the author

Pete, an expert in all things mortgages, cut his teeth right in the middle of the credit crunch. With plenty of people needing help and few mortgage providers lending, Pete found great success in going the extra mile to find mortgages for people whom many others considered lost causes. The experience he gained, coupled with his love of helping people reach their goals, led him to establish Online Mortgage Advisor, with one clear vision – to help as many customers as possible get the right advice, regardless of need or background.

Pete’s presence in the industry as the ‘go-to’ for specialist finance continues to grow, and he is regularly cited in and writes for both local and national press, as well as trade publications, with a regular column in Mortgage Introducer and being the exclusive mortgage expert for LOVEMoney. Pete also writes for OMA of course!

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FCA Disclaimer

*Based on our research, the content contained in this article is accurate as of the most recent time of writing. Lender criteria and policies change regularly so speak to one of the advisors we work with to confirm the most accurate up to date information. The information on the site is not tailored advice to each individual reader, and as such does not constitute financial advice. All advisors working with us are fully qualified to provide mortgage advice and work only for firms that are authorised and regulated by the Financial Conduct Authority. They will offer any advice specific to you and your needs.

Some types of buy to let mortgages are not regulated by the FCA. Think carefully before securing other debts against your home. As a mortgage is secured against your home, it may be repossessed if you do not keep up with repayments on your mortgage. Equity released from your home will also be secured against it.

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