Mortgage After Pay Day Loans
Published 11th December 2017
Declined for a mortgage because of payday loans?
We can help! A payday loan is short term, often high rate borrowing designed to provide funds that are repaid within a month (on payday), usually lent by an internet provider (i.e. Wonga) or a doorstep lender (i.e. Provident).
We generally find customers have taken them to cover unforeseen emergencies, such as cars breaking down, emergency boiler repairs etc. and there’s no disputing there is a place in the market for them. The principle of offering instant access to money is a sound one, providing much needed support when the unexpected happens and the borrower can’t wait until the end of the month for their wages. In practice however, these loans come with high rates and fees relative to the amount borrowed, typically over 1000%, and although positioned as more of a ‘one off’ solution, studies show that repeat use is extremely common.
Can I get a mortgage if I’ve had a payday loan?
Thankfully getting a mortgage after using payday loans is possible, yes. As we explain further on in this article, most lenders decline customers who have recently used payday loans, some even decline if they show on credit files at all over the last six years. It depends on how recent and regular the payday loan use was, along with your loan to value (LTV) and if you have had any other credit issues in the past.
Don’t payday loans increase your credit score for a mortgage?
NO! Many people we speak to have searched online for the impact of payday loans on their mortgage application, and have sadly found a lot of incorrect information. Even on Experian’s own website it states that payday use doesn’t harm your chances of mortgage approval… take it from the experts that help customers who have been declined for mortgages everyday - this is wrong!
In writing this article we have come across several sites proclaiming that use of short term credit like payday loans improves your credit rating, and in fact that isn’t untrue – credit scores offered by the main credit reference agencies such as Experian, Equifax and Call credit DO increase if you actively take payday loans and repay them on time. This is because their algorithms assume it proves you can repay on time, and thus must be a good borrower. Mortgage lenders however, have their own separate scoring model and lending policy, that specifically prohibits any payday use, and you will often be declined on application regardless of your “score”.
It may therefore be possible to have a 999 Experian score, and still be declined for a mortgage.
Why don’t mortgage lenders accept Payday loans?
Regular payday loan use can cause issues with potential mortgage lenders, as underwriters can consider it a mismanagement of finances and a potential indicator of risk, and we speak to hundreds of customers who have been declined as a result. That’s not to say there aren’t lenders out there for you, as thankfully there are lenders offering mortgages after payday loan use at competitive rates, and the specialists we work with already know which lenders will accept payday loan use.
Finding a mortgage with a history of payday loan use can be tricky for several reasons.
- Lack of clear lending policy:
Lenders are not exactly transparent when it comes to their criteria, and many lender websites and support centres make no mention at all of how payday loan use impacts mortgage approval.
- Lack of specialist broker knowledge:
Sadly even “whole of market” brokers don’t understand the market well enough to be able to give sound advice on mortgage criteria and payday loans, as many don’t come across these borrowers often enough to research lending policy across the hundred or so lenders they work with.
- A “try it and see” attitude to applications:
As intermediaries, we have direct access to lender support teams and development managers, and often they don’t even know their own stance, with many of the high street simply suggesting that you ‘make an application and see’ – not helpful advice.
How will a payday loan affect my mortgage application?
Payday loan mortgage applications can be subject to certain restrictions:
- Loan to value (LTV)
Borrowing up to high LTV’s (90-95%) can be difficult as it limits which lenders offer products, and it is mainly only the high street that go to this level. Unfortunately, most of the lenders accepting payday loan use require more deposit/equity, starting at 15% minimum, but there are one or two who can go up to 95% in certain circumstances.
- Product choice
As mentioned, the number of lenders available will be limited. This means that you are restricted to whatever rate types and terms they offer. With access to the whole market you’d have your pick of fixed, variable, offset with cashback, flexible repayment terms and any of the thousands of mortgages on the market. If you have used payday loans your products will be restricted to whatever those lenders offer, which may limit your repayment terms and strategy.
- Rate & Fees
Due to the increased risk these lenders perceive your application to have, it is common for rates and fees to be higher if you have used payday loans, however this isn’t always the case. The longer ago you used payday loans, the more deposit/equity you have, and the better your lending credit score, the more chance you have of being approved at more competitive rates, and often the specialists we work with can find lenders with deals in line with the mainstream deals on the high street.
Again depending on which lenders will consider your application, your affordability can be impacted. Each lender considers income differently, and offers a different maximum loan size based on their attitude to risk. Some cap lending at 4x your annual income, others 3x, others use a more complex affordability model based on your monthly disposable income. It’s quite common for one lender to offer 200k, where another offers the same customer 300k, and for this reason having a specialist approach the right lender for you is all the more important to allow you the best possible route forward. The type of income you have is also a factor and those deemed higher risk (newly self-employed or working in a new job, variable income, maternity leave etc.) will have a limited number of lenders to choose from.
How long does a payday loan stay on my credit file?
Your credit history follows you around for 6 years, so any borrowing you take or payments you miss will be recoded for that long. The older the registration date, the less impact it will have on any new mortgage application. As mentioned above, some of the stricter lenders will decline your application if you have EVER had one, others accept use right up until the current month, if it can be explained.
Which payday lenders can harm a mortgage application?
Pretty much all of them!
Pay day loans are usually recorded on your credit report as an “advance against income”, “short term credit”, or “revolving credit”, depending on the lender and the credit reference agency you search with, and will also show the lender name and payment terms.
There’s scores of lenders out there all pretty much doing the same thing, including: Wonga, Provident, Lending Stream, Sunny, Swift Money, QuickQuid, PaydayUK, Cash Float, Mr Lender, Pounds to Pocket, Piggy Bank and many others.
How soon after a payday loan can I get a mortgage?
This depends mostly on the Loan to value. Generally, the more deposit / equity you have, the better your chances of approval.
|Loan to Value||Approx. number of lenders accepting payday loan use over 12 months ago||Approx. number of lenders accepting payday loan use inside the last 12 months|
Note: The information in this table is accurate as of December 2017, Criteria can change regularly so it is important you make an enquiry and speak to one of the experts who can provide you with specific, up to date advice.
Mainstream mortgage lenders offering payday Loans
Typically, most high street lenders’ policy is to decline borrowers who use payday loans, however when positioned in the right way, it is sometimes possible to get approved in the right circumstances. Halifax mortgages’ stance on payday loans for example, is not to approve borrowers who show a reliance on revolving short term credit month to month. This is also true of Nationwide mortgage payday loan policy, Natwest mortgage payday loan policy, Bayclays mortgage payday loan policy, Hsbc mortgage payday loan policy, and Santander mortgage payday loan policy.
Getting an adverse credit mortgage after payday loans
The added impact of other adverse credit on a mortgage after payday loans, can make it all the more difficult to find a lender. Generally, payday loans and bad credit are one and the same – if you have used a payday loan, even if repaid on time, it is considered by mortgage lenders as an issue.
Our section on adverse credit mortgages here goes into detail about how possible it is to find finance despite recent or historical credit issues, at various LTVs.
Getting a mortgage with late payments, defaults, CCJs, in debt management plans, IVA’s, and after a bankruptcy or repossession are all possible, with as little as 5% deposit in some circumstances. However, add to these recent payday loan use, and lenders are likely to scrutinise the application even further to establish if you are likely to miss payments or default in future. Often if a “life event” (redundancy, death in the family, or divorce etc.) has caused the adverse credit and you can evidence a recovery, it’s possible to get approved again. If, however, you have just been irresponsible with your money and there’s no reasonable explanation, it can be harder to convince a lender you are now creditworthy.
Getting a mortgage with a payday loan default is even more difficult, as not only have you relied upon short term credit to get by, you have been unable to pay it back after payday, which to lenders is a red flag indicating that you may be really struggling with money.
That said, if you can evidence things are now back on track, then it’s not always terminal, and there are lenders who will consider you depending on how much deposit/equity you have available, and how recent the default was registered. If over 12-24 months ago you have a much better chance.
I've been refused a mortgage due to a payday loan, what should I do now?
We regularly see customers who have been declined a mortgage due to payday loan use, either on initial application, or worse, having been approved in principle and then refused at the 11th hour on full application when the lender’s underwriter picks it up. This can happen as lender scoring systems don’t always identify the payday loan automatically, giving false accept decisions that are later overturned when the human underwriter assesses the case.
If this happens it can be a big as to have your payday loan refused mortgage application overturned. The way to avoid being declined is to apply to the right lender from the off, one who knows about and is accepting of the payday loan upfront.
So - Make an enquiry! We’ll pass you to the specialist who successfully arranges these mortgages on a daily basis.
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