Even before you think about talking to the bank, if you are wondering ‘Could I afford a mortgage?’, car finance is something you need to think about carefully in conjunction with your income and outgoings.
Car finance is a form of debt, and will be treated as such by a mortgage provider. So once you get to the point of approaching a mortgage lender, they’ll consider the outstanding finance you have to pay when assessing your mortgage affordability, and deduct it from your income.
Moreover, if you mismanage your car finance by making late payments, your credit score will be negatively impacted. This can significantly limit your options when applying for mortgages, affecting everything from the products open to you to the rates you’ll be offered.
Whether you currently have a car finance deal and are looking to take out a mortgage, or you are saving for a mortgage and considering taking out car finance in the meantime, we’ll explain your options in detail in this guide.
How much does a car loan affect a mortgage?
The extent to which a car loan can affect your mortgage application hinges on a number of variables. For instance, if you apply for a mortgage while you have outstanding car finance to pay, lenders will factor in the repayments as part of your outgoings and consider it when assessing your mortgage affordability.
This means they will use your outstanding monthly repayments to create an annual repayment figure, which would be deducted from your total annual income when calculating your ability to afford a mortgage.
Mortgage lenders will assess whether you could afford your mortgage payments on top of your car finance payments and any other debts.
Lenders will also examine your credit rating carefully when you apply for a mortgage. Any missed car finance payments will appear on your credit score and could affect your mortgage application.
Could I afford a mortgage with car finance?
Mortgage providers will thoroughly scrutinise your finances when you enquire about one of their mortgage products to determine how much you can borrow.
Having car finance may limit the opportunities available to mortgage applicants. For example, having outstanding finance on your car can mean you get offered lower loan amounts and higher rates of interest by lenders who consider you higher risk if you have multiple loan repayments to meet.
During a mortgage affordability assessment, the provider will inspect your bank statements, typically for the three months before you made the application, to get a handle on your spending habits.
If they see you are spending a few hundred pounds a month out of your salary on car finance repayments, they may see you as having limited power. Your affordability for a mortgage, therefore, will be judged on the proportion of your salary that goes towards your car finance payments, any other debts, and your living expenses.
Before applying for a mortgage, make sure you understand what your debt to income (DTI) ratio is. DTI is a metric to determine how much of a person’s monthly income goes towards debt payments. You can calculate your DTI by dividing your monthly recurring debt by your gross monthly income. Include all forms of debt: car finance payments, credit cards and loans.
Lenders will expand this beyond the finance costs and look at all the associated costs of you running your car, including petrol, road tax, insurance, breakdown cover and maintenance. Read our guide on how much it costs to run a car in the UK and use our in-built car cost calculator to understand exactly how much you are spending on your car each year.
It definitely helps to get your house in order financially before applying for a mortgage. But let’s step back from the banks for a second. Regardless of how they see your affordability, the cost of owning a car is something you should have a handle on for yourself.
In general, before applying for a mortgage there are a number of steps you can take to improve your chances of being accepted and offered the best deal. Don’t forget the higher the deposit you save up, the better the deals you’ll get.
You could, if you were close to the end of your car finance agreement, wait until the term is over, or you could choose to pay off your debt early by asking for a settlement figure from your lender. This would mean your mortgage application wouldn’t be affected by any car finance repayments, which could improve how lenders see your affordability.
Bear in mind that paying off your car finance earlier than scheduled may result in exit fees.
If you’re considering applying for a mortgage and car finance for the first time simultaneously, you may want to reassess as lenders may consider you a risky borrower.
You will boost your chances of being accepted for finance if you limit your finance applications – making too many applications in a small space of time could count against you, as they will trigger hard credit searches on your credit file which lenders will see when assessing your affordability.
Will a car loan affect my mortgage application?
The mortgage provider will take into account your monthly car finance repayments and also the outstanding balance left to pay. For personal contract purchase and hire purchase agreements this figure will be the total value of the car, minus the repayments that you have already made.
If you bought your car with a personal loan, the provider will look at the remaining balance of the loan. Learn more about the different types of car finance and how they will impact your personal finances.
As mentioned, mortgage providers deduct your outstanding car finance from your income to judge if you could afford to repay a mortgage.
Of course on top of this, your mortgage lender is going to be looking at any other debts you need to repay and your other household expenses, so car finance will not be viewed in isolation.
Car finance and credit score – how does car finance affect my credit score?
Before applying for any form of finance, you should look at your credit file to understand your financial circumstances and chances of being accepted for the loan you require.
You can before applying for a mortgage or any other form of credit to see how likely it is that you will be accepted. This will allow you to look at your credit score, a key indicator of your creditworthiness to lenders, and work to improve any areas that may be dragging your rating down.
Your credit file will tell you of any debts that you have yet to repay, and highlight any late payments. Fortunately, there are a number of immediate steps you can take to rebuild your credit history.
- Pay your bills on time
- Pay off debts as quickly and reliably as possible
- Reduce your total debts
- Limit credit checks on your file – try to keep at least 12 weeks between credit requests
Alternatively, you can consider making an enquiry to specialist providers who offer mortgage deals to those with poor credit histories.
These providers will charge higher interest rates, so avoid entering into these agreements if you cannot afford the monthly repayments, as this could cause your debt to spiral.
Compare mortgages and car finance
Wherever you are in your home buying journey, start off on the right foot by comparing mortgage and car finance deals today.