Mortgage with credit card debt

Mortgage with credit card debt

Millions of Brits across the UK have at least one credit card, so there’s nothing unusual about credit card debt, however, securing a mortgage with credit card debt can prove problematic if you have a huge outstanding balance or loads of other short-term credit obligations.

How do mortgage lenders view credit card debt? How much is too much and how will credit card debt affect a mortgage? This guide explores the factors that could affect the likelihood of getting your mortgage approved with credit card debt. Read on.

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Is it possible to get a mortgage with credit card debt?

The answer is – it depends. Lenders consider many factors when deciding whether or not to approve your mortgage application when you have outstanding debt or how much your debt repayments are. 

They’ll want to know how much you owe on your cards, whether you have other loans or financial agreements, and whether you’re keeping up with all your repayments. Missed repayments signal lenders that you might have difficulty keeping your head above water. They may jeopardize your chances of securing a mortgage.

If their findings show that you can afford a mortgage despite your ongoing short-term debt obligations, they’ll approve you for a property loan. If your debt-to-income ratio is out of whack, lenders will put a cap on the maximum amount you can borrow based on what they deem you can afford to repay. The debt-to-income ratio shows your leftover income after meeting your recurrent expenditure.

The bottom line is this: If your income is enough to cover your credit card debt, living expenses, and mortgage costs, securing a mortgage should be the least of your worries.

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How important is credit card debt on mortgage applications?

Credit card debt matters to mortgage lenders, but not to the extent you might think. It’s not so much the credit card debt itself than your ability to properly manage your finances.

Let’s say you have five credit cards in your name and have maxed out the balance on each. It communicates to potential lenders that you are living beyond your means. It signals to them that you’re not financially stable.

Before a mortgage company can approve you for a loan, they will usually do an affordability assessment, especially if you have outstanding credit card debt. It helps them determine how much to lend you based on the mortgage repayments you can afford over and above your credit card payments.

For instance, suppose you have a £10,000 balance on the two credit cards you own. You must make a minimum debt repayment of 3% of the balance every month, which works out to £300. The property loan lender will deduct this amount from your net income to determine your mortgage affordability.

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How much is too much?

Is there such a thing as “too much” credit card debt? There’s no single answer to this question, although the consensus is – you should aim to keep your balance as low as possible. The sweet spot is around the 30% mark, or the credit utilization rate. If you have a £5,000 limit on your credit card, aim to keep your balance below £1,500.

That said, this is not a hard and fast rule. “Too much” credit card debt can mean different things to different people, and all boils down to your debt-to-income ratio.

Let’s say your monthly income is £5,000, and the outstanding balances on your credit cards require you to pay £1,500 monthly. That’s not a cause for alarm if you can manage the repayments along with your other living expenses, such as rent and utilities.

On the other hand, if your credit card repayments total £3,500 on a £5,000 a month income, that would be considered “too much” and would certainly limit your mortgage options. Most lenders tend to turn down borrowers with a high debt burden. Those who qualify will often be saddled with unfavourable terms compared to individuals with low credit card debt.

Your best bet would be to offset as much of the debt as possible before applying for a mortgage.

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Your mortgage application was rejected due to credit card debt – now what?

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You applied for a mortgage and the lender rejected your application citing high credit card debt. While this was, no doubt, disheartening, it doesn’t mean it’s the end. There are plenty of options available from specialist lenders.

Get in touch with our expert team of advisors at Loan Corp, and we’ll match you with a broker that can negotiate a mortgage on your behalf with mortgage companies that cater almost exclusively to bad credit borrowers.

Plenty of lenders with a high-risk appetite would be willing to work with you to find ways to reduce the risk you pose to them. Some may even let you consolidate your current credit card debt into a mortgage.

Consolidating credit card debt in a remortgage application

One of the most common ways to leverage equity in your home is to use it to pay off short-term debt and align your finances once and for all. When you remortgage, you can either increase the value of your current mortgage or secure a new mortgage entirely to pay off the current one. You can then channel the higher balance towards covering the repayments on your credit card balance(s).

How to secure a mortgage with credit card debt

Lenders have different criteria when determining who qualifies for a mortgage with credit card debt. Here is a list of criteria that’s common across the board:

Affordability

As mentioned before, lenders will always assess affordability to determine whether you can afford a mortgage with your existing credit card debt. To do this, they will deduct your monthly credit card repayment amount from your net income to determine how much you can afford in mortgage repayments. The mortgage amount you qualify for will be based on this assessment.

Credit history

The other thing they’ll be interested in is your credit report. They’ll analyze the credit issues that appear, how long it has been since they were initially registered, how severe they were, and whether you have since settled any overdue accounts. Serious credit issues such as bankruptcy, county court judgments (CCJs) and individual voluntary agreements (IVAs) don’t generally augur well with mortgage lenders.

Age

Mortgage lenders also consider your age. Most lenders have an upper age limit beyond which they cannot approve an individual for a loan. This is usually set to 85, although some lenders don’t have an age cap.

The idea behind placing a maximum age limit is to ensure that the borrower can repay the mortgage in full by the end of the term.

Type of property

The type of property you’re buying will also play a big role in whether a lender approves you for a mortgage or not. If you’re buying a property that will serve as your primary residence, your credit rating will be a determining factor in whether your application goes through, even with credit card debt.

On the other hand, if you’re getting a mortgage for a buy-to-let property, a lender is more than likely to reject your application if you have significant credit card debt. The best thing to do would be to consult an experienced broker to help you secure a mortgage with top bad credit lenders.

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Does credit card debt make it harder to qualify for a mortgage? Yes, it does, but it doesn’t preclude you from securing a loan. Lenders are more concerned with your debt-to-income ratio than the actual credit card debt. They examine whether you can afford a mortgage despite your credit card debt.

Not sure where you stand? Our broker-matching service will link you to an expert bad credit mortgage broker to help you secure a property loan with a specialist lender that’s likely to approve your application for a mortgage with bad credit.

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FAQs

Loan vs credit card: Which is worse when applying for a mortgage?

Different lenders view different types of debt differently. For the most part, credit card and loan debt are viewed in the same light. A £5,000 personal loan or a £5,000 balance on a credit card makes no difference to a lender.

All they want to see is that you’re not in over your head and comfortably making the repayments. Your loan-to-income ratio is what will determine the mortgage value you qualify for.

It is worth noting that not all loans are created equal. For instance, a payday loan in your credit history implies financial mismanagement and could potentially hurt your chances of qualifying for a mortgage.

Should I pay off my credit card debt before applying for a mortgage?

You don’t have to, but it will certainly help. Significant outstanding debt factors into your debt-to-income ratio, which, in turn, directly impacts the mortgage amount you can borrow. While zero credit card balances are better for your eligibility, properly-managed credit card debt isn’t a deal-breaker.

Can I use my credit card to make my mortgage repayments?

Very few lenders accept mortgage repayments in forms other than direct debit. Rarely do they accept payments in a form that contributes to your overall debt burden, which is what credit cards do. Discuss the accepted modes of payment with your mortgage provider beforehand to know what’s acceptable and what’s not or contact us now for expert advice. 

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