Will a personal loan reduce your chances of getting a mortgage? And should you pay it off if you can before you apply to a lender? Read on to find out more about how any debt is likely to affect your mortgage application…

Should you pay off a loan before getting a mortgage?

A modest debt is unlikely to be an issue provided you’re making regular monthly payments on time. Lenders will take existing debts into consideration when looking at your mortgage application but having a personal loan shouldn’t generally stop you from getting a mortgage. They will be looking at whether you can afford the mortgage on top of your existing financial commitments.

However, it’s also important to show lenders you are a responsible borrower, which means consistently making payments on time and not having a chequered history of missed or late payments.

What do lenders look at when deciding whether to give you a mortgage?

Lenders will typically take the last six years of your financial history into consideration, but remember each lender is different and has its own criteria. A lender will look at your current income and outgoings and your credit history.

If you have a lot of credit cards and only pay off the minimum balance each month, and continue to use those cards, this could affect their perception of you as a prospective borrower. However, if you are making regular payments on time and regularly paying off more than the minimum amount, this should stand you in good stead as it shows that you are a responsible borrower.

What if you had a CCJ more than six years ago?

If you have had a CCJ (County Court Judgement) or default against you in the past and it’s more than six years old, it will be removed from your credit history, which means lenders won’t be able to see it. This means your credit score should improve. That said, don’t read too much into credit scores as lenders will measure your credit worthiness based on their own scorecard.

What if you or your partner has a poor credit history?

Having a bad credit rating won’t necessarily stop you from getting a mortgage. Depending on the situation, you may need to apply to a specialist lender, and you may pay a higher interest rate as you are considered to present more of a risk to a lender. Remember that many credit problems will clear from your records after six years. However, if it’s less than six years and you’re applying for a mortgage, be open with your broker about your past so that they have all the information they need in order to help you.

What if you have multiple credit cards?

If you have a lot of credit cards, a lender could see you as posing a higher risk. Get rid of any credit cards you’re not using.

Should you pay off a loan if you can?

If you are in a position to pay a loan off or need to do so for affordability purposes – for instance, if the outstanding monthly payment of a loan is limiting how much you can borrow – then it’s fine to do so.

That said, you don’t necessarily need to do it in order to get a mortgage. A lender might deem a mortgage to be affordable even if a loan is retained and, providing both the loan and the mortgage fit within your budget, it might be more important for you to retain the capital.

However, be aware that your current borrowing can impact your ability to borrow further. A reputable mortgage broker can guide you on this.

What’s the best way to pay off debt?

There are two popular methods people use if they can’t afford to repay an entire debt in one go – the debt avalanche and debt snowball methods. With debt avalanche, you focus on clearing the debt with the highest interest rate. With the debt snowball, you pay off the smallest debt first and work your way up.

If you are unsure about your credit rating, it may be worth getting a credit report.

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