If you’re planning to buy a house, you might be wondering how your car finance can affect your mortgage application. Can car finance stop you from getting a mortgage? How does car finance affect your credit score and affordability? How can you get the best deal on both car finance and mortgage? In this article, we’ll answer these questions and more, and give you some tips on how to manage your car finance and mortgage effectively.
Buying a property and taking out a mortgage is one of the most exciting things to happen in your life. Years of saving for a deposit finally pay off as you're ready to embark on your next step by yourself or with a friend or partner.
Before you get to the moment of being handed the keys and walking through the threshold of the home you now own, you must go through the process of applying for a mortgage, going back and forth with solicitors, advisors, and estate agents.
It can be daunting as you request to borrow hundreds of thousands of pounds from a mortgage lender and make a commitment and reassurance that you will pay them back.
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That is why they must undertake thorough checks of your financial history, your credit profile, earnings, outgoings, and current finance agreements, including car loans, amongst other things.
Car finance is a form of loan, so mortgage lenders need to look at it and be confident that you can make your repayments, as you will be expected to do the same with your mortgage every month.
How does car finance affect my mortgage?
When you apply for a mortgage, prospective lenders will scour your credit history and view past and present car finance loans, even if you paid them off several years ago.
Lenders need to be confident that you will make the repayments; they put a lot of trust into your ability to sustain payments, especially as the loan will be huge.
If at any time over the years that you've made a late repayment or failed to make a payment, this could count against you, and it is up to the lender's discretion whether they invest in you.
You won't necessarily get offered a mortgage, but you may miss out on some of the better offers and have higher interest rates to pay if you have a history of missing payments.
Although it may seem minor, car finance loans can substantially impact your mortgage application, so you should always ensure you keep on top of your repayments.
How does car finance affect my credit score?
Every time you've taken out a loan to pay for something - including your mobile phone - those transactions are kept on your credit file to be assessed every time you apply for something new.
Your credit report generates a credit score for each person, and mortgage lenders will scrutinise that to ensure you are worthy of their investment.
If your credit score is higher, a better chance you have of getting a better mortgage rate as you will appear more responsible than someone whose score may be lower.
A poorer credit score doesn't necessarily mean you won't get approved for what you want, but you may receive an offer with higher interest rates or not be able to borrow the amount you'd like, thus meaning you may have to look for a home that costs less.
If your credit score is too bad, you sadly may be unable to obtain a mortgage.
Keeping up with your car finance repayments will improve your score, just as missing a payment will reduce it. The finance you took out six years ago can still be seen on your report; it's critical to make the repayments or potentially miss out on future loans.
How does car finance affect my affordability?
Besides credit history, mortgage lenders will also be interested in knowing your current loans and outgoings, including checking your bank statements.
They will be able to see how much you repay on your car finance each month, and if you took out a deal where you make large repayments each month, this could count against you as you'll have less money to help repay your mortgage.
They will be looking for your disposable income and where the percentage of your salary goes.
How do I protect my finances when taking out car finance?
Buying a car is expensive, so it's fair to say the chances of you taking out a loan to fund one are normal. 90% of all new car sales get bought using some form of finance plan.
To absolutely guarantee that your car finance deal doesn't affect your mortgage application, you should do the following:
- Make your payments on time - don't allow yourself to miss a repayment, no matter what.
- Only borrow what you can afford - the prospect of a £40,000 BMW may be enticing, but if that means you're going to be forking out £500 per month on it, leaving you with £1,000 to cover everything else, then perhaps it's not worth it right now.
- Research before taking out car finance - find the best deal that suits you. If the interest rate is too high, perhaps shop around or leave it a few months to build up your credit score.
- Clear your car finance before applying for a mortgage - if you can afford to, settling your car finance before applying for a mortgage will show lenders that you can afford and make repayments on time, making you a trustworthy loanee.