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Does using your overdraft affect your credit score?

It’s a common point that comes up in a relatively high number of mortgage applications in the UK, because lots of borrowers regular use their overdraft facility and especially if you’re saving to buy a house. While it can impact your mortgage application, it is highly unlikely that you won’t be able to get a mortgage due to using your overdraft.

‘Three in Ten UK adults uses their overdraft every month’ according to recent survey by YouGov in 2023. We know that many banks and building societies often promote for their customers to use their overdraft facility to help them to prevent short-term financial problems, such as one-off payments or bills.

In this guide, our mortgage experts explain how using your overdraft can affect a mortgage application and some of the top tips to help you out. Using your overdraft should not be a reason for your mortgage application to be declined, but there are things to be aware of that could impact your new mortgage deal.

Getting the right mortgage deal will depend on your credit history and your credit score which can also be impacted by consistent overdraft use, especially if you go over your limit or if you use your overdraft every month. Mortgage lenders will look at your financial behaviour over the past several months to make sure that you can afford your new mortgage repayments.

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1 Minute Mortgage – Does using your overdraft affect your mortgage?

Recent financial pressures have meant that more people than before have encountered difficulty in managing their money. This isn’t usually a problem, unless you’re thinking about moving home or if you need to remortgage your property.

Overdraft mortgage applications are extremely common in the UK because of how many people regularly use their overdraft facility.

  • Overdraft use is not a reason for your mortgage application to be refused in isolation and there will often be several options for people who just use their overdraft infrequently.
  • Regular or consistent use of your overdraft can impact your credit score which can have an impact on your mortgage application, especially for those who exceed their limit or if your overdraft is not a pre-approved facility.
  • Mortgage lenders will often review your past 3 months bank statements as part of the application process to look for issues with managing your finances.
  • Overdrafts will often incur fees which can also be seen as a red flag to mortgage lenders if you are consistently paying extra fees to your bank or building society.
  • 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.

Using an overdraft facility should not affect your credit score from any of the main credit reference agencies (e.g. Equifax, Experian, or TransUnion). Your score will usually be a number between 0 and 1,000 depending on which credit agency you use.

Your credit score is based on your payment history for any credit agreements that you have, which can include use of your overdraft facility. Generally, your credit score will not be directly linked to your overdraft but there are certain things that will impact it such as not repaying credit or defaults.

This isn’t actually a simple question to answer because all lenders will have slightly different criteria for affordability and credit history. What we can say is that an overdraft is classed as a form of credit and so this will show up  on your credit report when mortgage lenders do 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. Mortgage lenders might simply ask you for an explanation about why you’ve used your overdraft and some clarification on the circumstances.

Some mortgage lenders are simply better than others for lending to those with a low credit score or less than perfect credit history. Often it is better to get advice from a qualified mortgage specialist who can search the market to find the best mortgage deal based on your circumstances.

Martin Lewis Explains How To Escape Your Overdraft For Good | This Morning

If you are struggling to get out of your overdraft, financial journalist Martin Lewis provided some useful tips on this topic in an interview on ITV’s This Morning, as shown in the clip above.

When you apply for a new mortgage or a remortgage, it’s common practice for them to ask for at least one month’s bank statements and usually three months. These will clearly show your bank balance over that period and whether there have been any minus periods (e.g. in your overdraft).

Mortgage lenders will look at your financial behaviour on your bank statements and any red flags that might prevent you from repaying your mortgage. An overdraft is not usually classed as bad credit and especially if it can be explained such as large purchases (e.g. holidays, cars, home improvements, school fees etc.).

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Mortgage lenders will also be able to see whether your bank or building society is charging you overdraft fees and what those fees are. Any overdraft fees will show up on your bank statement (usually as ‘bank charges’) which will also probably need to be explained to your mortgage lender.

You should always have a chance to explain bank charges when you apply for a mortgage and they shouldn’t affect your mortgage application. Your mortgage broker should prepare a document or provide an email to the lender which should support your application.

There’s usually a perfectly normal explanation for bank charges and as long as you pay them then you should be fine.

What if my mortgage was declined because of my overdraft?

Even though it’s unlikely that your mortgage will be refused because of using your overdraft, some mortgage lenders might still not be willing to offer you a mortgage. This can be very frustrating but it can happen and it’s definitely not the end of the road as far as getting a mortgage.

You should be very careful not to make multiple mortgage applications because being refused more than once can also affect your ability to get a mortgage. It is usually best to speak to a qualified mortgage expert at this point to get them to search for the best lender based on your credit history.

There could be other things that are affecting your ability to borrow and these will just need to be taken in to account. It’s also fairly common in the current climate for mortgage lenders to be quite selective and so this is unfortunately not unusual.

Which are the best mortgage lenders for overdraft mortgages?

Even though there isn’t such a thing as an overdraft mortgage, this term can be used for specialist mortgage lenders who are more lenient for low credit score applications. We’ve included a list below of the main mortgage companies that would generally be classed as subprime lenders for people with poor credit or credit problems, including:

Mortgage provider reviews

Note: The list above is to show that there are options for people who might struggle to get a mortgage because of credit problems. Using your overdraft shouldn’t be a reason for needing a specialist mortgage lender, but it can be part of a bigger problem or financial difficulty in many cases.

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 agreed overdraft 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 usually won’t even appear on a credit report. If your overdraft is unauthorised or not managed properly then it can show on a lenders credit check or when looking at your bank statements.

You should think carefully before borrowing money or using your overdraft if you’re thinking about applying for a mortgage, because 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, including:

  • 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.

There are a few things that you can do if you’re going to be applying for a mortgage in the future and you regularly use your overdraft. Mortgage lenders will only look back over the past 3 months as a rule so you’ve got that amount of time to try to get everything sorted and ready for your mortgage application.

Frequent use of an unauthorised overdraft can be a red flag to mortgage lenders which can give the impression that you won’t be unable to afford your mortgage repayments.

Top tips for getting yourself ready to apply for a mortgage with an overdraft:

  1. Explanations and reasons: always have a good reason for using your overdraft (so you can explain to lenders if necessary).
  2. Stay out of your overdraft: try to avoid using your overdraft if you don’t need to and especially for 3 months prior to applying for a mortgage.
  3. Repay your overdraft: clear your overdraft as soon as you can to show that you can afford your monthly outgoings.
  4. Don’t go over your overdraft limit: never go over your arranged overdraft limit (unless this is unavoidable) because mortgage lenders don’t like this.

If you have an arranged (authorised) overdraft that is well managed, this shouldn’t cause too many issues when looking for a mortgage. Mortgage lenders will always view debt or credit arrangements that are well managed more favourably than poorly managed debt. This includes things such as credit cards or store cards where the balance is consistently paid off.

As many personal finance experts suggest, the best way to get a mortgage with any credit history problems is to get advice from a qualified mortgage specialist. Applying for a mortgage is complicated enough and especially if there are things that can cause extra problems or could cause your application to be refused.

An overdraft mortgage might not seem like a complex problem, but there are certain mortgage lenders that won’t like certain circumstances. Getting a mortgage with an overdraft can just add to some of the frustrating questions and your mortgage expert should be able to sort this out for you.

If you need to speak to one of our friendly mortgage experts then you should contact us on 0800 009 6559 or CLICK HERE for help.

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