How Overdraft Usage Affects Your Mortgage Application: What You Need to Know
When you’re preparing to apply for a mortgage, every aspect of your financial situation comes under scrutiny, and that includes your overdraft usage, in the same way lenders look at your other debts.
Overdrafts are a common financial tool used by many to manage short-term cash flow, but how does dipping into your overdraft impact your ability to secure a mortgage?
At Kerr & Watson, we understand the concerns you may have and are here to guide you through the process of mortgage applications, especially if you’re worried about how your overdraft might affect your chances at this time.
Can You Get a Mortgage While in Your Overdraft?
The simple answer is yes, you can still secure a mortgage even if you’re currently using your overdraft.
However, how you manage that overdraft can influence your application and lenders all have different tolerances on this.
Mortgage lenders look at various factors when assessing your application, and your overdraft usage is one of them.
Factors Lenders Consider:
Frequency of Overdraft Usage
If you’re frequently in your overdraft, it could signal to lenders that you’re struggling to manage your finances. With some lenders, this can raise concerns about your ability to handle mortgage repayments.
Type of Overdraft
There are two types of overdrafts—arranged and unarranged. An arranged overdraft, where you’ve agreed on a limit with your bank, is generally seen as more favourable than an unarranged one. Unauthorised overdrafts or exceeding your limit can be a red flag for lenders as it suggests you find yourself with debts that were not expected to you.
Impact on Credit Score
While being in your overdraft might not directly harm your credit score, how you use it can. Regularly maxing out your overdraft or incurring fees, especially for going over the limit can negatively affect your creditworthiness in the eyes of mortgage lenders. To find out more about your credit rating, you can get a free trial from Check My File.
How Does Overdraft Usage Impact Mortgage Applications?
Mortgage lenders typically review your bank statements for the last three months as part of the application process. They do this to assess how well you manage your finances, including your use of overdraft facilities. Here’s how your overdraft usage might be viewed:
Affordability Assessment
Lenders use your bank statements to gauge your affordability. If your overdraft usage suggests that you are living beyond your means, they may view you as a higher risk. For instance, consistently dipping into your overdraft could indicate that you are reliant on this credit to cover everyday expenses or go beyond your budget for the month, which might suggest financial instability. Read more on what is an affordability assessment.
Financial Behaviour
Your financial behaviour, as evidenced by your bank statements, plays a crucial role in your mortgage application. Lenders will look at whether you frequently exceed your overdraft limit, incur overdraft fees, or if your balance is consistently negative. Such behaviours may suggest poor financial management, which might lead some lenders to decline your application or offer less favourable terms. This is not always the case, and mortgage applications are generally assessed on their full merits. You should talk to a mortgage adviser to find out more.
Debt-to-Income Ratio
Lenders also consider your debt-to-income ratio, which is the amount of your monthly income that goes towards paying off debts. If your overdraft is contributing significantly to this ratio, it might affect the amount you can borrow, whether a lender will agree your application or the mortgage rates offered to you.
Lenders all have different rules around this so what may be unacceptable to one may be perfectly acceptable to another. Talk to an adviser to find out more.
Find out Your Options
Tips to Improve Your Mortgage Chances If You’re Using an Overdraft
If you’re concerned that your overdraft might affect your mortgage application, there are steps you can take to improve your situation:
Minimise Overdraft Usage
Try to reduce your reliance on your overdraft in the months leading up to your mortgage application. If possible, avoid using your overdraft altogether, as this will demonstrate better financial management to lenders.
Clear or Reduce Your Overdraft
If you can, pay off your overdraft or at least reduce the balance. This can improve your credit profile and reduce your debt-to-income ratio, making you more attractive to some lenders.
Manage Your Finances Proactively
Ensure that all your other financial commitments are being managed well. If you are in a position to, paying off credit cards, loans, and other debts on time will positively influence your credit score and show lenders that you are financially responsible. This will not always lead to a successful application but low amounts of debts are always better than high amounts.
Seek Professional Advice
The mortgage market can be complex. At Kerr & Watson, we specialise in helping clients with diverse financial backgrounds secure the best mortgage deals.
Our experts can guide you on how to present your finances in the best light to potential lenders.
How Lenders View Different Types of Overdrafts
Understanding how lenders perceive different types of overdrafts can help you better prepare for your mortgage application.
Arranged Overdraft
An arranged overdraft is one that you’ve set up in advance with your bank. Lenders generally view this more favourably, especially if you use it responsibly and within the agreed limit. Consistent repayment of the overdraft or staying within the limit shows good financial management and that you can handle credit, responsibly paying your creditors.
Unarranged Overdraft
An unarranged overdraft, where you go over your limit without prior agreement with your bank, is less favourable. Lenders see this as a sign of financial mismanagement and may be more cautious about lending to you. Frequent use of an unarranged overdraft can sometimes impact your mortgage application, certainly with some lenders.
Conclusion
Being in your overdraft doesn’t automatically disqualify you from getting a mortgage, but it may require careful management.
Lenders look closely at how you handle your finances, and responsible use of an overdraft can help towards a successful mortgage application. If you’re concerned about how your overdraft might affect your mortgage prospects, it’s wise to seek expert advice.
At Kerr & Watson, we are here to help you every step of the way. Our personalised approach ensures that we find the best mortgage solution for your unique circumstances. Contact us today for tailored advice.
