Does being in your overdraft affect a mortgage?
A common question that we hear from our users is does being in your overdraft affect a mortgage application? Most banks offer an overdraft facility to its customers and most people will use their overdraft several times a year.
Here are a few things to think about when you’re buying a home or remortgaging your existing property with an overdraft.
Having an overdraft facility on your bank account can have a positive impact on your credit file and credit score. Well managed overdraft usage will often be viewed by mortgage lenders positively and could give you access to lower mortgage rates.
Does being in your overdraft affect a mortgage?
It’s difficult to say whether being in your overdraft will be the defining factor on getting your mortgage, but there are some critical points to think about.
Top tips for managing your overdraft for a mortgage application
- Try not to go over your arranged overdraft limit
- Don’t use your overdraft too often
- Make sure that you clear your overdraft as quickly as possible
- Only use your overdraft if you need to
- Have a good explanation or reason for using your overdraft
Ultimately, an overdraft is a type of credit and will be viewed as a debt on your credit file when you apply for a mortgage. Well managed debt will always be viewed far more positively than badly managed debt, which can be a red flag to mortgage lenders.
Alternatives to borrowing on an overdraft
There are several alternatives to using an overdraft facility which may be more favourable on a mortgage application. You might need to consider these options and especially in the months running up to getting a new mortgage or a remortgage.
Other options for borrowing money:
- Loan from family: if you’re able to borrow money from a close relative or family member then this is the best option as it doesn’t show on your credit file and interest or fees won’t usually be charged
- Credit cards: low-interest credit cards are the next best option as they have a lower impact on your affordability and credit score
- Loans: you may also need to consider a short-term loan which can have an impact on your affordability and credit score from a credit check, but won’t usually affect your ability to get a mortgage
How do the different types of overdraft affect a mortgage?
There are two main types of overdraft and both will be considered when you apply for a mortgage.
- Arranged overdraft is where your bank has approved a set limit based on your credit history, earnings and management of your bank account. Using your arranged overdraft from time to time and repaying it quickly might not even show on your credit report, and can even help with your credit score
- Unarranged overdraft (or unauthorised overdraft) is someone that either does not have an overdraft facility or where an account holder goes over their overdraft limit. If you go over your overdraft limit or are overdrawn then this can cause issues with a mortgage application and can affect your credit score/credit rating
How does being in your overdraft affect a mortgage?
There are several ways in which being in your overdraft can affect a new mortgage application or a remortgage. You should think about why you need to use your overdraft and how that might look to a mortgage lender.
- Affordability can be affected by over-use or being in your overdraft for too long because lenders will take this in to account as part of your income and expenditure. They can view a large overdraft (unauthorised) as a high risk for lending.
- Credit score will also be lower for someone that regularly uses their overdraft or who goes over their overdraft limit occasionally
- Credit history and credit profile will be worse for someone that doesn’t properly manage their bank account or overdraft, which can show as missed payments
Your whole credit profile will be looked at when you apply for a mortgage and your bank account forms part of this. Recent bank statements will show if you use your overdraft regularly, how much you use it, and how quickly you repay the balance.
How to get a mortgage with an overdraft
There are several ways to save money and get a lower mortgage rate if you’ve got an overdraft or if you use your overdraft. Getting proper mortgage advice from a qualified mortgage adviser can be the best way to make sure that you get the right deal.
A qualified mortgage expert will be able to tell you which lenders are best for you and advise you on how to manage your finances to get a better deal. They can help you save time and increase the chance of mortgage approval.
There are some key areas where a mortgage broker will be able to help you to get the best mortgage deal with an overdraft, including:
- Working out a plan to improve your credit profile
- Look for specialist lenders if there is adverse or bad credit
- Help to reduce costs and lower mortgage repayments
If you need help to get a mortgage with an overdraft then call 0330 118 8188 or CLICK HERE for more information.
More about mortgages:
We have several guides relating to credit issues and mortgages that could be useful: