Does being in your overdraft affect mortgages?
A frequently asked question that buyers have is ‘does being in your overdraft affect a mortgage application?’. It is possible to get a mortgage when you are in your overdraft, but there are a few additional things you will need to think about.
Overdrafts are commonly used in the UK and most banks and building societies will offer an overdraft facility. Statistics from Finder suggest 26 million Brits will use their overdraft each year, either as an arranged or unarranged (unauthorised) overdraft.
In this section:
- Does being in your overdraft affect a mortgage?
- How does each type of overdraft affect mortgages?
- Getting a mortgage with an overdraft
- How to get a mortgage with an overdraft
Does being in your overdraft affect a mortgage?
It isn’t straightforward to answer this question as all lenders will have slightly different criteria for affordability. What we can say is that an overdraft is classed as a form of credit and so will show when lenders perform a credit check.
If you are using your overdraft wisely and not exceeding your arranged limit, this should not have a major impact on your credit score or ability to borrow.
Some lenders are far better than others for lending to those with a bad credit score or less than ideal credit history. We have spent time carefully selecting a range of excellent lenders that specialise in poor credit mortgages. This includes:
- Accord Mortgages
- The Mortgage Lender
How does each type of overdraft affect mortgages?
There are two main types of overdrafts available and either type will be assessed by mortgage lenders during your application.
- Arranged overdraft: your bank has given you an approved set limit that you are allowed to go into your overdraft. Your allowed limit will be based on your credit history, how much you earn and how well you manage your bank account.
- Unarranged overdraft: This can be a red flag for lenders. This is when you do not have an arranged overdraft attached to your account and become overdrawn. This can also apply to going over your arranged overdraft limit.
An arranged overdraft can improve your credit score, if it is well managed and repaid promptly. If you repay your arranged overdraft quickly, it might not even show on a lender’s credit report. If your overdraft is unauthorised or poorly managed, this can show up on a lender’s credit check when looking at your bank account.
You should think carefully before using your overdraft, as there are several ways this could impact your mortgage application. It is important to consider how you manage your bank account and how this will look to mortgage lenders. Your overdraft can affect:
- Your affordability: a large overdraft that is unauthorised, frequent overdraft use, or being in your overdraft for too long can be a concern for lenders. You could be viewed as high risk for lending, leading to issues with your application or being declined.
- Credit score/credit profile: if your overdraft is unauthorised or poorly managed this can show on your credit history as missed payments. This can then cause your credit score to be lower.
Getting a mortgage with an overdraft
Your entire credit history will be evaluated when you apply for a mortgage. This includes any loans or finance agreements you have. All your recent bank statements will be able to show whether you regularly use your overdraft and how well it is managed. Frequent use of an unauthorised overdraft can lead lenders to believe you will be unable to afford your mortgage repayments.
Our main advice regarding overdrafts and mortgages would be:
- Always have a good reason for using your overdraft (so you can explain to lenders if necessary)
- Try to avoid using your overdraft if you don’t need to
- Clear your overdraft as soon as you can
- Never go over your arranged overdraft limit (unless this is unavoidable)
How to get a mortgage with an overdraft
It is best to try not to use your overdraft if you are thinking about applying for a mortgage soon. This can help increase your chances of approval and there are several alternatives to an overdraft that can be better options e.g.:
- Borrowing money from a friend or family member: This won’t show up on your credit history and can be a better option for small loans.
- Low interest credit cards: These will have much less impact on credit score and affordability compared to overdrafts.
- Short term loans: A secured short term loan could affect your credit score but shouldn’t impact your ability to get a mortgage.
If you do have an overdraft and need mortgage advice, you can speak to our highly skilled mortgage specialists. Our team of expert mortgage brokers will help you to get your mortgage sorted and get the lowest rates available.