Overdrafts and Mortgages

Overdrafts are a common form of borrowing in the UK and simply having one is unlikely to have much of an impact on your mortgage application. But the way you manage it might.

In this article we’ll explain how different mortgage providers view overdrafts and how you can make sure you apply with the right lender.

Can you get a mortgage if you have an overdraft?

Yes. Most current accounts come with an overdraft facility and it’s not uncommon for people to dip into it every month. Provided your overdraft use is not overstretching your finances, there is no reason why it should prevent you getting a mortgage.

In some cases, remortgaging to consolidate debts and clear an overdraft could even help you gain greater control of your financial situation.

Different types of overdrafts

Overdrafts can be:

• Arranged – Pre-approved by your bank up to a certain limit
• Unarranged – Not approved by your bank

Both can attract fees but those associated with an unarranged overdraft are usually higher. Either will be factored into a mortgage affordability calculation.

How overdraft use can affect your application

If you have an overdraft balance, it will show on your credit file. A well managed overdraft can enhance your credit rating while a poorly managed one can lower your score.

Only dipping into it occasionally and clearing it every month may result in it not even showing on your credit report.

Your overdraft is assessed by lenders to help establish:

• How you manage your finances
• Affordability

Occasionally going outside of your arranged overdraft may limit your pool of potential lenders a little but will not be seen as a huge negative provided you can demonstrate good overall control of your finances.

Some lenders will ask for an explanation for entering an unauthorised overdraft as part of the application process. If you have gone outside of your arranged overdraft limit at any point in the six months prior to a mortgage application, you should speak to a broker before applying.

Lots of lenders allow a maximum of two months of unsecured finance arrears in the last twelve so applicants who regularly go into an unarranged overdraft may need to use a specialist bad credit mortgage lender.

How much does the size of your overdraft affect your chances?

The size of your overdraft and how much of it you use will also be looked at by lenders. Going fully into your overdraft – rather than occasionally dipping in – every month is not necessarily a negative but may raise concerns with some lenders and result in enhanced affordability checks.

Any recent increase in your overdraft can be interpreted as an early sign that finances are beginning to be squeezed. On the contrary, a decreasing overdraft balance is a positive sign.

Even a large overdraft that you never touch will concern some lenders as you could use it at any point and increase your debt and outgoings. If you have overdrafts that you don’t use, consider cancelling or reducing them before applying.

You are generally advised against applying for or extending an overdraft if you are looking to apply for a mortgage in the next 6 months.

How a broker can help

There is no need for an overdraft to adversely affect a mortgage application, but to make sure you get the best deal and lowest rates you need to approach the right lender and package your application so that it matches their lending criteria.

A broker with extensive knowledge of how each UK lender views and assesses overdrafts will help make sure you don’t overpay or get black marks on your credit file following a rejection.

If you get in touch we’ll arrange for an advisor we work with, who has experience in this area, to contact you straight away.

What to do if you have been declined because of an overdraft

First of all don’t panic! This could simply be a case of applying with the wrong provider. The worst thing you can do at this moment is assume you must clear your overdraft before getting a mortgage.

Practical steps to improve your chances of approval

• If you can, it makes sense to ensure you are within your agreed overdraft limit as soon as possible. It may also be advisable to wait until you have 3 months ‘clean’ bank statements before reapplying.
• If you haven’t already, take stock of your overall financial situation. Are there monthly subscriptions or non-priority bills that you can get rid of to make your overdraft easier to manage? Tidying up your overdraft at the expense of other credit or priority bills is not going to improve your chances of approval.
• Consider paying a set amount off your overdraft each month when you get paid. You could even speak to your bank about gradually reducing it over a period of time.
• Sometimes, converting a large overdraft into a personal loan can help make things more manageable. This is often cheaper and you will have a set repayment plan and definite date for when the debt will be cleared. This will also show potential lenders that you take your finances seriously. If you choose this option, be sure to cancel (or least significantly reduce) your overdraft.

What NOT to do

• If a personal loan is refused, don’t be tempted to clear your overdraft using a credit card. That is another form of credit that can leave you stuck in a rut and can be even more expensive than an overdraft.
• Adopting a scattergun approach of applying to multiple lenders in the hope one will accept you is ill advised. It will have the exact opposite result as each application will impact your credit report. This will increase your chances of further rejections and limit your pool of potential lenders – both of which result in higher interest rates when you are accepted.
• Don’t apply again without seeking advice from a mortgage broker with experience in this area.

There are plenty of lenders willing to take applications from people no matter how they use their overdraft. It is just a case of finding the right one with the best rates to match your current circumstances.

Get matched with a broker experienced with overdrafts

Whether you have an arranged overdraft or regularly used an unarranged overdraft, the way you manage this type of borrowing shouldn’t prevent you from being approved for a mortgage. But to ensure you get the lowest rate available it’s important that you approach a lender who is sympathetic to your financial profile.

Our broker matching service will put you in touch with a mortgage advisor who is experienced in assessing the impact of overdrafts on applications and has whole of market access. This means they know the UK mortgage market inside out and can quickly identify the right lender for you and then help package your application correctly.

Call now on 0808 189 0463 or enquire online to arrange a free no-obligation chat.