In many ways, car finance and a mortgage are rather similar. They’re a long-term loan that’s repaid over several years in order to buy an asset that would otherwise be unaffordable. The only real differences are the amount of money involved and the duration of the contract. As excellent as car finance is, it can negatively affect your ability to secure a mortgage. Before you turn your back on car finance forever, there are ways to minimise or even eradicate the negative impact of car finance on your mortgage applications. We discuss them below.
Quite simply, having a car on finance is a form of debt, and lenders tend not to look favourably on applicants with existing debts. The larger the debt, the larger the problem it is for prospective lenders. Plus, applying for a loan of any kind will cause a temporary drop in your credit score, so if you’ve acquired your car finance shortly before applying for a mortgage, your credit score could be unusually low and exacerbate the effect.
Applying for car finance and a mortgage at the same time is a big mistake. Making numerous credit applications at once is strongly looked down upon by lenders and negatively affects your credit score. It suggests hastiness and a lack of organisation, qualities that don’t make for a good credit risk in the eyes of lenders. It’s far more advisable to apply for them at separate times.
That being said, it’s not all doom and gloom. Having a car on finance does not mean that you’re unable to secure a mortgage. There are many factors that lenders take into account when assessing mortgage applications, and pre-existing loans are just one of them.
The primary factor is net income. It comes down to whether you’ll be able to afford the repayments of both car finance and a mortgage, along with all other typical expenditures such as bills and general living costs. As part of the background checks that mortgage applicants undergo, lenders will be privy to your recent financial and employment records. This will provide evidence of your ability (or lack thereof) to meet repayments. As long as you meet the requirements, there should be no reason why you’ll be refused a mortgage while you’re paying for car finance too.
You’re only likely to run into issues if you try to overextend yourself and apply for mortgages or car loans that our out of your budget (or at least very close). Not only does it suggest that you’ll struggle to meet repayments each month, but it also suggests a lack of consideration or responsibility on your part as a borrower. It should come as no surprise that lenders do not look favourably on these traits.
If you’re in a situation where you have existing car finance to pay off and you’re searching for a mortgage, there are a number of things that you can do to reduce the negative impact on your applications.
First, we recommend paying off your car finance as soon as possible. This may sound obvious, but if you’re financially able, it’s advisable to arrange an early payment with your lender. If this isn’t possible, then it may be a good idea to delay your mortgage application until you’re free from debt and in a better situation financially.
Our second recommendation is to ensure you make your car finance repayments on time every single month. You should be doing this anyway, but it’s even more pertinent when you’re applying for a mortgage. It’s evidence of fiscal responsibility and will boost your credit score, both of which will improve your chances of being accepted for a mortgage.
Another key factor that lenders assess is your debt-to-income ratio. The higher your debt-to-income ratio, the less money you’ll have available to spend on a mortgage. Therefore, it’s advisable to pay off or cancel any other forms of credit you currently have. The lower your debt-to-income ratio, the better.
We’ve touched on credit scores, but your credit profile more generally may require attention. You should do everything you can to improve your credit profile. This can be a simple as checking that the information held about you on your credit profile is correct or joining the electoral register. Check out our dedicated blog post for more tips on improving your credit score.
The next thing we recommend is choosing a reasonable mortgage. By this, we mean setting your sights a little lower and choosing a house or mortgage rate that’s realistic for your current situation. Mortgages are great in that they allow us to buy houses that we’d otherwise never be able to afford, but don’t take this idea to the extreme at the expense of your budget.
Finally, as well as doing all the above, you’ll probably want to consult a specialist mortgage expert. They’ll take into account all of your incomings, outgoings, and plans to give you the right advice for your exact situation. As with most things in life, speaking to an expert is often the best course of action.
Here at Carplus.co.uk, we specialise in providing car finance for those in difficult financial situations. If you have any questions regarding car finance generally, get in touch with us today at 020 3389 6489. Alternatively, you can check out our blog, where we discuss a wide range of topics around getting the most out of your car finance.View more from Blog