If you take out a payday loan, even if you make all the payments on time, you could find it harder to get a mortgage. Find out why.
What mortgage brokers say
BBC Newsnight recently asked a mortgage trade publication to carry out some research on its behalf. The magazine, Mortgage Strategy, asked mortgage brokers whether a payday loan had affected a client’s application It found:
- Of the 289 mortgage brokers who responded, 68% said they’d had a client who’d been turned down for a mortgage because of a payday loan.
Mortgage broker John Charcol warned in October that it was seeing clients with payday loans have their mortgage applications turned down. It says:
- There’s a particular problem with buyers who want to take out high loan-to-value mortgages. If you want to borrow 75% or more of the property’s value, you will find that the mortgage lender will pay much closer attention to what’s on your credit file.
- Some mortgage lenders turned down people who had taken out payday loans. Others still gave them a mortgage but for a much lower amount.
- People who are thinking of taking out a payday loan aren’t being warned that it could damage their credit rating if they want to take out a mortgage.
- Not all lenders take the same approach. By and large it will be the smaller building societies that will be more flexible and where you can put a case to them.
- If you’ve taken out a payday loan in the last six months, you’re more likely to be turned down than if you’ve taken one out earlier. If the payday loan is a one-off and wasn’t taken out too recently, more mortgage lenders may still be happy to take out a mortgage.
- People applying for help to buy mortgages are more likely to be turned down because of payday loans than those who apply for non-help to buy mortgages. “The evidence is anecdotal at the moment,” says Simon Collins of John Charcol. “But we believe a lot of people are being turned down for help to buy high loan-to-value mortgages.”
Simon Collins says, “As far as most mortgage lenders are concerned, if you’ve taken a payday loan, then this is irrefutable proof that you are living beyond your means; end of discussion. A recent payday loan is a massive negative in the eyes of mortgage underwriters but one that no one warns borrowers about.”
What you can do
If you’ve taken out a payday loan recently, don’t panic. It doesn’t necessarily mean that you won’t be able to get a mortgage, although it could make it harder. My advice is:
1. Don’t take out a payday loan if you can possibly avoid it. See if you can make cutbacks, borrow money on your credit card (If you need to borrow) or from family or friends. Don’t think about a payday loan because it’s ‘convenient’.
2. Pay off your payday loans as quickly as you can.
3. Get hold of a copy of your credit report. This will show you what information is recorded about your payday loan. There’s information on how to get hold of your credit report in the section called ‘Credit rating’.
4. Talk to a mortgage broker. A good mortgage broker will be able to tell you which mortgage lenders are more likely to lend to you if you have taken out a payday loan and which could turn you down.
SAVVY TIP: If you took out a payday loan because, for example, you’re self employed and a client didn’t pay you on time and you had some expenses you couldn’t avoid paying, a mortgage lender may look on your application more favourably than if you took it out to buy Christmas presents.
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