In a word – yes! This article will give you an understanding of how the banks take debt into consideration when reviewing a mortgage application, as well as information on the other lending avenues out there. The best option for you depends entirely on your personal circumstances. Contact us for a free consultation. We will give you advice and support specific to your situation.
How do the banks view debt when considering a mortgage application?
When reviewing a mortgage application, the banks look at three things relating to debt:
- Current debt
- Liability
- Credit score
Current debt
First, they will deduct any loan payments when calculating your income. Let’s say you have an income of $50,000 per annum after tax. You also have loan repayments totalling $10,000 per annum. The bank will reduce your calculated income to $40,000. Sometimes, if the loan amounts and types show a pattern of ‘reckless’ spending, the bank may consider whether the applicant is going to responsibly manage the financial obligations of a mortgage
Does the bank care about big student loans?
When it comes to student debt, the banks aren’t usually concerned by the amount. This is because the loan repayments are always based on the person’s income, not how much is owed. And student debt is considered ‘good’ in that it likely has improved the person’s earning prospects in the long run. Given that some professions require students to go into debt in the hundreds of thousands, this is a big relief for many prospective homeowners!
Does the bank care about loans that are nearly paid off?
It’s important to be aware that the bank doesn’t look at when the term of a loan is up. If you’re a couple of months away from paying off your car loan at the time of applying, the bank won’t take that into account. Instead, they’ll calculate your income as if you are making those loan payments for the foreseeable future. For this reason, it can sometimes be a good strategic move to pay off a debt sooner. That would mean however that you’re likely to reduce your deposit, so it’s a bit of a balancing act. We can help you decide what the best move is for you.
Liability
Liability refers to any credit card or overdraft limits. When it comes to credit cards and overdrafts, the bank doesn’t look at how much you currently owe. Instead, they will calculate your debt using the assumption that you will spend up to your credit card and overdraft limits. So, a great first step to getting your finances in order is always to reduce your limits down as much as possible. This will increase your “income” as the bank sees it.
Credit score
Finally, they will look at your credit score. This will reflect any “bad debt” you may have. Generally speaking, bad debt means late or missed payments for loans and bills, tax debts and defaults and bankruptcy. You may not be aware that credit inquiries also reduce your credit score. Every time you apply for a hire purchase scheme or credit card etc your credit gets checked, impacting your score.
What are my options when my mortgage application is declined by the banks?
It can be really disheartening if you get your mortgage application declined due to bad credit. You may have tidied up your finances and be in a secure financial position but due to your credit history the bank won’t lend to you. This is where non-bank lenders are a great option. We’re not talking about those shady finance companies that charge 8% interest per week and encourage you to go into debt for a holiday or a flash car. Non-bank mortgage lenders fill an important space. They provide loans to people who can afford a mortgage but aren’t able to get a loan with a bank.
Why can non-bank lenders give me a mortgage when the banks won’t?
They can approve mortgage applications that the banks have deemed too risky. To enable them to take risks, they charge a higher interest rate than the banks. This isn’t something to fear, you just need to factor the cost into your budget. It’s the price to get you into the property market now and secure a big asset for your future. They’re a great short-term solution to get into your own home. The key thing is to go in with a plan to get your finances tidied up to the point you can go to a bank within a couple of years.
We love supporting clients into their first home through a non-bank lender – and then helping them into a mortgage with a bank a year or so later. Once our clients have a mortgage with a bank (and therefore lower interest rates) we encourage them to continue to make the same payments as when they were paying more interest. This means their mortgage gets paid down faster and saves them huge money in the long run than if they’d just been making the minimum payments.
So there you have it, you can get a mortgage with debt or bad credit
Don’t assume a mortgage isn’t possible for you in your current circumstances. The key thing is to get expert advice to understand your options and maximise your chance of your application being approved. Platinum Mortgages specialises in solutions for people who have been declined by the banks. If there is a way, we will find it for you. We’re here for you for the long term, from helping you put a plan in place to get a mortgage, managing the loan process for you, getting you the best mortgage and mortgage structure, and managing your mortgages throughout your lifetime. We love seeing our client’s financial situations improve with our help, securing their future and a place to call their own.