Did you know that buying a car and a house are probably the most expensive things you’ll ever purchase! 😮 Both require heavy investments in terms of the cash amount needed. Thus, most of the population relies on car finance to purchase a vehicle, and need a mortgage for the house.
As a first-time buyer, one of your main concerns should be, "does car finance affect mortgage?" Yes, it does, because borrowing money for one will significantly affect your ability to obtain finance for the other.
Just like in car finance, when applying for a mortgage, lenders have a thorough check on your finances, to weigh your ability to maintain monthly repayments. Defaults or late payments on your car finance loans will affect how easy it is to get a mortgage for your home.
How Does Car Finance Affect My Mortgage Application?
In comparison to any other loan, a mortgage is likely the most money you will ever borrow. It has a long-term commitment and requires a lengthy period for it to be fully paid back. Due to this, mortgage lenders are keen on borrowers with other loan obligations such as car finance who are maintaining their repayments.
However, if you are making late payments or none at all on the car loan, this adversely affects your credit score. The better your credit history, the more trustworthy you appear to your mortgage lenders. If you look more reliable you are likely to get lower interest rates.
Defaulting on your car finance deals damages your creditworthiness years after you have completed paying back the loan. Taking a car loan above your financial ability hurts your chances of getting a mortgage for your dream house. It’s best to consider all these options before making a decision.
Having an expensive car loan requires you to make high monthly repayment fees. This means that your monthly income is affected, and you have less buying power. Most of your money is committed to the car, leaving you with less cash to keep up a fixed monthly mortgage payment schedule.
As a buyer, it is vital to analyse how getting a car loan will affect getting a mortgage? If you plan to buy a house in a few years, pay attention to the costs of the vehicle you wish to get. Also, weigh the options to determine which is more important to you and your family, at the moment, and in the future.
Control your buying power to boost your financial capability to buy a house.
How Is Your Finance Application Assessed?
The cash to finance both car loans and mortgages comes from your monthly income balance. When assessing your application, financial lenders have to analyse whether you are reliable enough to meet the repayments.
Mortgage lenders require information from you such as bank statements, current commitments, bills, and payments before approving your loan. This information includes your car finance deals. Furthermore, they also look at your income to debt ratio. If your debt is too high compared to your salary, you have a lower chance of getting a mortgage.
Car finance affects your mortgage application because if your monthly payments on the car are high compared to your salary, you might not have enough residual income to get funding for the house.
Mortgage financiers work with credit reference agencies to get all your information that proves your reliability. Based on this rating, they decide whether you qualify for a mortgage and at what interest rates.
How To Improve Your Chances Of Getting A Mortgage
Most individuals can't avoid using any financing when getting a car. However, you can prevent yourself from missing out on a mortgage because of a car loan. Here are some tips to improve your chances of purchasing a home.
Make Timely Payments
Making on-time monthly repayments on your car loan significantly boosts your credit score. Late payments and defaults could hurt your chances of receiving any further financing from a lender.
A car and a house are both essential needs for you and your family. To ensure that you get both of them, only borrow what you can afford to pay back.
For instance, if you qualify for an expensive car loan, it's best not to go all out for a big loan and think about the future. If you borrow sensibly, you will have enough monthly income left to pass the mortgage affordability test.
Choose Your Car Finance Wisely
There are different car finance products out there, such as hire purchase, personal contract purchase, or a personal loan. Analyse which plan has better terms, especially interest rates and extra final fees. Know exactly what you are committing to. An expensive car finance plan can affect your mortgage application because once you miss any payments on your vehicle, you risk missing out on a mortgage loan.
Pay Off The Car Finance balance
If you are in a position to clear your car loan before applying for a mortgage, do it. Paying off one debt boosts your income to debt ratio, making you more attractive to mortgage lenders. As a buyer, if you can't balance the two, carry out an analysis of your finances and hold back on the mortgage application until you can afford it.
Check Your Credit History
If you want to check whether car finance affects your mortgage in the UK, you can have a credit score review. There are agencies such as Equifax or Experian that will carry out and provide an updated credit history report. Having this analysis done in advance enables you to identify any financial information errors and make necessary corrections.
Once you get this, you can also carry out more personal research on your current situation. Put together all your financial records with information on current and past transactions as proof for the mortgage lender. Understanding your exact financial situation significantly helps your case and improves your chances of getting a loan.
Of course, you would like to have both a car and a house! But before taking out a loan for either a vehicle or home, ensure that you are financially capable of making the monthly repayments.
Your current level of debt in relation to your income is a critical factor for most lenders. If your repayment ability is poor, delay making different loan applications, because car finance will affect your mortgage application.