Andrew Wayland is Marketing Manager at Everyday Loans
If this article were to be a paragraph long, the simple answer would be that any loan can affect the approval of a mortgage. A person’s credit history goes back six years and holds the key to their financial history and allows lenders to determine if they should be loaned. Bad credit history and individuals risk being denied access to the most expensive mortgage products on the market or only having access to the most expensive mortgage products on the market, resulting in a high interest rate and a monthly repayment.
In 2013, two-thirds of brokers revealed that they had a client who had been turned down for a mortgage after a payday loan.
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It is also estimated that 42% of millennials have turned to payday lenders to finance their lifestyles over the past five years, and with this generation increasingly eager to move up the property ladder, their habits of expenses should have an impact on their future.
However, all is not pessimistic for those who have taken out a short-term loan or a personal loan in particular.
The Halifax Building Society once stated that it treats payday loans the same as any other type of personal loan or credit history. Provided they have been managed properly and there is no loan outstanding for more than three months when a mortgage application is made – this information is then included in an affordability assessment.
When a lender assesses a credit history, they typically look for trends that arise in a person’s spending habits, looking at both current payments and payments made. For example, if you were to borrow some money on a short-term loan in the middle of the month, it could signal a lender that you are unable to effectively manage your finances. Something you’ll need to stay on top of when you have mortgage payments and other utility bills to pay.
This is not the case with a lender who victimizes you when they turn you down for a mortgage or don’t offer you as much as you would have hoped, they are just trying to avoid putting you in a risky financial situation. . Owning a home is likely to increase your current expenses, and adding another payment on top of it, when you can’t afford your current lifestyle, can sound the alarm bells.
Many of those who take out loan products often believe that if they repay the amount in full, it will not have any negative impact on their credit history. However, this is simply not the case. While lenders want to see that you can pay off a loan and meet your monthly payments, taking out a short-term loan when you don’t need it can make your case seem fraught with financial risk. So if you don’t need a loan, don’t take one.
For first-time buyers in particular, building a good credit history is essential to access the real estate ladder, as they are unlikely to have had the financial experience or repayment responsibilities that many lenders are looking for. Everything from car financing to cell phone contracts is included in a credit history check and can provide good enough metrics for a lender to make sure you’re financially stable. So, you don’t need to take out other forms of credit to prove that you can repay a lender responsibly.
Lenders have their own individual checks, so while one may turn down someone with a bad credit history, another may choose to lend to them. However, it’s important to remember that lenders don’t just look at the number and immediately make a decision – they will be looking at the behaviors surrounding the numbers.
While any loan has an impact on whether or not a mortgage is approved, other related factors are also taken into account.
Affordability assessments and credit calculations are also done to ensure that any mortgage provided is affordable in addition to ongoing expenses. This involves considering whether, if the base rate of the Bank of England changes, individuals will still be able to pay their monthly payments in addition to any other financial issues that may be subject to change. If the conclusion is that these factors could put you in a position of financial risk if you were approved for a mortgage, then it is unlikely that you will be loaned on them, whether or not you have taken out a payday loan.
Using a mortgage broker during your mortgage application process often allows you to present your side of the story to mortgage insurers about why you already took out a short-term loan. However, it is advisable to have no short-term credit for the previous year and no bad debts when making your request.
Any credit commitment you take should be managed wisely and efficiently. Avoid overspending when you can, avoid short-term loans in the lead-up to your application, and if you have unpaid debts, make an effort to pay them off first. Finally, remember that if you are refused credit, it is because an advisor does not want to increase the financial charges that you currently have.