Updated: January 14, 2022

Getting a Mortgage With Outstanding Debt

Can you still apply for a mortgage when you have debt? How much debt is too much? Find all this and more in our in-depth guide!

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Pete Mugleston

Author: Pete Mugleston - Mortgage Expert

Updated: January 14, 2022

Student loans, credit card bills, car finance; at one time or another, most people have had some form of debt to contend with. But exactly what impact can debt have on your mortgage application?

By following this guide, you’ll learn which types of debt could prevent you from getting a mortgage and which won’t, what steps you can take to improve your chances of approval and where to look for guidance.

Can you get a mortgage with outstanding debt?

Yes, you can. It all depends on the type of debt you have and how much it is. If you’ve racked up tens of thousands of pounds on store cards and regularly use payday loans, you might find getting a mortgage difficult. But, if you repay your credit card balance and student loans each month that shouldn’t be too much of a deterrent and in many ways will show a lender you can positively manage your finances.

Ultimately, a lender is looking at how reliable you’re going to be at paying back your mortgage loan. Too much outstanding debt isn’t a good look in that regard and if this can have a negative knock-on effect with your credit score.

Each lender works to their own set of eligibility criteria so whilst some may reject an application on these grounds, others may be willing to consider different aspects of your application.

An experienced mortgage broker would know which lenders tend to take a more in-depth look at the reasons behind your debt, so your application may be looked upon more favourably.

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What’s classed as debt?

Debt can be any type of finance arrangement which involves an obligation for money to be repaid by one party to another.

It includes a lot of common, everyday arrangements such as:

  • Personal loans
  • Mortgages
  • Student loans
  • Car finance
  • Mobile phone contracts
  • Credit cards
  • Store cards
  • Payday loans

Then there are the more serious forms of debt, which can typically arise as a result of everyday finance obligations, like those listed above, not being fulfilled, such as:

A certain amount of debt can actually help your application as long as it shows you make payments on a regular basis and take responsibility for your finances. Regular repaid debt also has a positive affect on your credit rating.

How to get a mortgage when you’re in debt

If you do have debt, be it good or bad, and you want to apply for a mortgage, there’s a few simple steps you can take to boost your chances of success:

Step 1. Calculate your debt to income ratio

It sounds like a daunting term but the debt to income ratio basically helps a lender determine whether the debt you have is too much for you to be paying alongside the mortgage you’ve applied for. A good lender wants you to be able to make your repayments comfortably.

Working out your debt to income ratio is fairly straightforward.

  • Make a list and add up all of your outgoing monthly payments including any debts as well as rent and bills.
  • Divide that figure by your gross monthly income. If you’re self-employed, tally up your average monthly income before tax.
  • Take the figure that comes up and multiply it by 100. That figure is your debt to income ratio as a percentage.

Monthly debt payments ÷ income before tax x 100 = debt to income ratio (as a %)

Ideally, you want that percentage to be as low as possible. Each lender has a different debt to income ratio they’ll accept, but generally anything under 36% is considered good. Anything over 45% and you’ll struggle.

Step 2. Reduce your overall debt liabilities

If your debt to income ratio isn’t great then don’t panic! There are things you can do to improve it:

  • Consider whether you can pay off any debts before submitting your mortgage application
  • Put a plan together to pay off those debts you’re unable to pay off right away
  • Close any credit cards or loan accounts you’re not using
  • Make regular payments to build up your credit history

Step 3. Speak to an experienced broker

Getting a mortgage can be stressful, but getting one whilst trying to manage all your other debts even more so. That’s why talking to a broker who has experience helping people in similar situations can help relieve a lot of this tension.

Using our unique broker-matching service, we can match you with an advisor who has the right level of knowledge and expertise in this area. They will know exactly which lenders to approach under these circumstances.

If you get in touch we’ll arrange for a broker we work with to contact you straight away

Remortgages

If you already own a property, remortgaging is always an option to explore if you need some extra capital. This is when you borrow money against the equity in your property and replace your current mortgage agreement with a new one, typically with a better interest-rate.

Can you remortgage to pay off your debts?

Yes, it’s possible, but it is contingent on a few things:

Is there enough equity in your property?

Most lenders let people borrow up to 90% of a property’s value. If you haven’t needed to borrow the full 90% thus far but need some money now, you could apply for a further advance to borrow the difference between what you’ve already borrowed and the 90%.

Do you qualify for a bigger mortgage?

Just like when applying for a mortgage for the first time, the lender will look at whether you can afford a bigger mortgage and that means reviewing your current financial position. Your original lender might accept your application or you may have to find a new lender more amenable to your new circumstances.

Is this a good thing to do?

There are pros and cons to adding your debt onto your mortgage. In the long-term, you’d be making the amount you’re borrowing bigger so it’ll take longer to pay back. There will also be an interest rate you pay on top of your mortgage so it’s worth weighing up how that interest rate compares to that on your other debt items.

This approach does, however, mean all your debts will be consolidated into one place, making them easier to manage as your total monthly outgoings should be reduced. It also removes any time pressure. Lenders for other debts might want to be repaid quicker while a mortgage is paid back at a more manageable rate over time.

Speak to a mortgage broker used to dealing with debt

The brokers we work with have years of experience helping people apply for mortgages with differing levels of debt. They can offer advice on how you can manage your debt and guide you through all the potential requirements a lender may need to approve your application.

Call 0808 189 0463 or make an enquiry and we’ll set up a fee, no-obligation chat between you and your ideal mortgage broker today.

Ask a quick question

We know everyone's circumstances are different, that's why we work with mortgage brokers who are experts in all different mortgage subjects. Ask us a question and we'll get the best expert to help.

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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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