Will car finance affect my mortgage?

Bungalow, terrace, city centre flat, cottage in the countryside, treehouse in the jungle (ooohh)?
No matter what your dream property looks like, buying a house is likely going to be one of the most expensive purchases you make in your lifetime – which is why the mortgage process can be so nerve-wracking.
When you have so much money on the line, knowing all the facts before you make a mortgage application is crucial. The more clued up you are on the things that can impact your mortgage approval and the interest rate you’ll be offered, the more steps you can take to prepare before submitting your application.
Car finance is just one of many factors that can affect your mortgage. Not only could it impact the amount you can borrow, but how you’ve managed your car finance can also affect whether you’re approved for a mortgage at all!
Read on to find out more about the connection between car finance and mortgages:

Will my car finance affect my mortgage application?

As one of the biggest financial decisions you might make in your lifetime, it probably comes as no surprise that mortgage approvals take a wide range of different factors into account.
One of the most important things that can help lenders decide whether to approve your mortgage application is your existing debts.
Not only do your debts affect how much you can afford to put towards a mortgage payment each month but the way you manage them can give lenders a good idea of how you might act as a borrower.
Car finance is a type of debt so it will impact your mortgage application. It can also be a significant monthly expense that will likely affect how much you can borrow to buy your new home. Generally speaking, the higher your monthly car finance payment, the less money you’ll have available to put towards a mortgage.
Your payment history will also play a part. If you’ve made late payments or missed a car finance repayment completely, this might have negatively affected your credit score and make it more difficult to qualify for a mortgage or secure one with a low APR. On the other hand, if you’ve got a perfect payment history, this could support your application and help you get a mortgage with a competitive interest rate.   

How does car finance affect affordability checks?

Most mortgage lenders will carry out affordability checks to make sure you’ll be able to manage your new mortgage payment as well as covering your other debt repayments and your essential living costs. Offering you a mortgage that you can’t afford puts both you and the lender at risk as it’s much more likely you’ll default on the loan.
Your outstanding car finance balance and monthly repayment amount will both be considered during these affordability checks.
The mortgage lender will usually look at recent bank statements to get an understanding of your typical income, expenses, and spending habits. Car finance will be one of these expenses and will restrict the amount of disposable income you have left over to put towards your mortgage.
If your budget is already squeezed, your finance payment could reduce the amount you can borrow to buy a home. Having more than one existing loan repayment to juggle can also increase the interest rate you’re offered as you might be considered a higher risk borrower.
Car finance will also increase your debt-to-income ratio. This is another factor that mortgage lenders consider when assessing your eligibility. It’s used to show how much of your income goes towards paying off debts like car finance, personal loans, and credit cards. The lower your debt-to-income ratio, the more likely it is that you’ll be approved for a mortgage.

What will impact my mortgage application?

While different mortgage lenders can look at different things, there are several factors that could impact your mortgage application including:

  • The amount you’d like to borrow
  • The size of your deposit
  • What type of property you’d like to buy and its potential risks
  • Your employment status and income
  • Your credit score
  • Your affordability and debt-to-income ratio

Why will outstanding loans affect my mortgage application?

The total amount of debt you have, especially compared to your income, can restrict the amount you can borrow on a mortgage. This is because outstanding loans affect your overall financial circumstances, influencing both your affordability and credit score.
If you have relatively small debts that you’re managing well and don’t leave you with a high debt-to-income ratio your existing loans could improve your chances of getting a mortgage. This is because they show lenders that you’re capable of making loan repayments in full and on time. As long as you have enough disposable income available to comfortably afford a mortgage repayment, your other monthly payments shouldn’t be a problem.
However, if you have a lot of outstanding debt and payments that you’re struggling to make each month, have missed payments in the past, or have a credit history that shows you’re relying on finance to fund your day-to-day expenses, this could raise alarm bells for mortgage providers and lead to your application being rejected.

How will these impact my credit score?

Credit scores are never fixed, they fluctuate depending on how well you manage your money alongside other factors such as being registered on the electoral roll and keeping the number of hard searches on your report low.
When you apply for car finance, you’ll usually undergo two credit checks to assess your eligibility. The first will be a soft credit check, which shouldn’t impact your credit score, but the hard credit check that follows will leave a mark on your credit report for up to two years. Having several hard checks in a short time can negatively affect your score so it’s worth spacing these out if possible.
Once your car finance is underway, how you manage the loan can also positively or negatively impact your credit score. Keeping up to date with your payments can improve your credit score over time. In contrast, making late payments – or missing them altogether – can negatively affect your score and show lenders that you’re an unreliable borrower.

FAQs about mortgages

How can I improve my chances of getting approved for a mortgage?

Although different mortgage lenders have different eligibility criteria, there are steps you can take to improve your chances of securing an approval:
·      Put down a larger deposit
The more you can put down upfront, the less you’ll need to borrow on your mortgage. This also increases the amount of equity you have in the property, which can give you more security if your mortgage rate goes up in the future.
·      Make your debt repayments on time
If you have car finance or any other types of credit like a personal loan or credit card, making sure you manage your payments well will help to improve your credit score and provide a solid payment history to the lender.
·      Wait until your car finance term ends
If you’ve only got a few months left to go on your car finance or you can afford to pay the settlement figure to end your agreement early, this could give you a greater chance of being approved for a mortgage. If you’ve kept up with all your repayments, the completed loan will be a positive mark on your credit report, and you also won’t have the income impact of a costly monthly repayment to worry about.
·      Don’t apply for car finance close to your mortgage application
If you can avoid it, try not to make a car finance application just before or after applying for a mortgage. This will avoid an extra hard search appearing on your credit report and will ensure your affordability and debt-to-income ratio don’t suddenly change halfway through the mortgage approval process.

Is car finance classed as a personal loan?

While some personal loans can be used to buy a vehicle, car finance is not typically classed as a personal loan. That’s because car finance can only be used to buy a car, whereas a personal loan is an unsecured type of borrowing that can be used to fund almost anything.