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By Pete Mugleston | Mortgage Advisor

Pete has been a mortgage advisor for over 10 years, and is regularly cited in both trade and national press.

Updated: 3rd September 2020*

If you’ve taken out a Debt Management Plan to help you pay off ‘non-priority’ debts such as a personal loan, payday loan or credit card bills, you may be wondering what sort of mortgage you can take out.

While a DMP may affect your credit rating, it’s certainly possible to get a mortgage while on one, so long as you meet the lender’s criteria.

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Can I get a mortgage with a DMP?

Yes, you may have options if you have a current and unsatisfied Debt Management Plan. Lenders will want to see that you’re able to afford the repayments on your mortgage and will your DMP provider for proof that you have shown satisfactory conduct and made your repayments for a period of time, for example six or twelve months.

The type of mortgage you could get will also depend on:

  • The length of time you’ve had your DMP (the longer the better, and satisfied even more so)
  • How much you owe (you may be able to settle some debts quicker)
  • How many years you plan on paying your debts off (average is between five to ten)
  • What your debts were relating to (e.g., overdraft or unpaid store credit)

The criteria for each lender will be different. Some will potentially accept your application, while some won’t consider your application for years after your DMP took place.

Bear in mind that if your Debt Management Plan was related to a secure/unsecure loan or a payday loan, some providers won’t accept your application. To ensure that you find the best mortgage lenders for your circumstances, speak with a specialist bad credit mortgage broker. They can access deals that aren’t available to the general public in order to give you exclusive options.

Deposit required

If you have a DMP in place, some lenders may require you to put down a 15% deposit. A maximum 85% loan-to-value mortgage is typically preferred for customers with bad credit, and if you have any other adverse on your file, you may be required to put down more.

While no 100% loan-to-value (LTV) mortgages are no longer available, if you’re struggling to raise enough cash for a deposit, you may be able to benefit from an ownership scheme or get a guarantor mortgage.

Other credit history

A DMP to make things more manageable, but if you’ve been keeping yourself afloat in debt, you may have other credit issues such as missed or late payments, defaults, a bankruptcy or CCJs. In isolation these credit issues could be accepted by some lenders, but throw in the DMP debt too and they may be less willing to consider the application.

It’s impossible to give specific advice, as each customer is different and may or may not be considered based on a number of factors, however, in general, borrowers with an active DMP can have:

  • Some late payments (max 3 months late usually)
  • Some defaults (max 2 registered in the last 2 years, any number older than this)
  • Some CCJs (max 2 registered in the last 2 years, any number older than this)

If anyone has more severe issues such as IVA / bankruptcy / repossession from the last six years and is also currently in a DMP then the likelihood of being accepted is low.

IVAs, bankruptcies, and repossessions are accepted by some specialist lenders if it’s the only issue you have, but adding in a DMP after these really limits lending options.

Income and affordability

The income and affordability rules for specialist DMP mortgage providers can differ to that of mainstream and high street lenders.

In the main, borrowers will be limited to 4x annual income. However, in certain circumstances, it may be possible to obtain up to 5x income, particularly if you have a good sized deposit and no other adverse credit issues.

Affordability will be impacted by the monthly cost of your DMP, if you don’t plan to repay it either before or at the time the mortgage completes.

Some lenders will take into account the monthly cost of the original credit agreements and others will take the monthly DMP repayment figure.

For instance, if you had six credit agreements that cost £1,500 originally, and are now £500 in the DMP, lender A may assume you are committed to a £1,500pm payment and lender B £500. The impact of this is such that lender A may offer a much smaller mortgage than lender B.

How you earn your income can play a part in this, too. Many lenders have very restrictive lending rules when it comes to what income they accept.

Thankfully, a lot of the specialist DMP mortgage lenders have flexible and unique income policies, and can accept customers who have only been self-employed a year or directors of a company that need to use retained profits rather than dividends drawn, for example.

Why is it hard to get a mortgage with a DMP?

You may find it harder because you need to prove to lenders that you’re trustworthy. A Debt Management Plan allows you to pay less than the minimum required amount you agreed to when you first took out your debts. Because of this, lenders will see you as higher risk, so they may turn you away or offer a higher interest rate.

While getting a mortgage with bad credit is harder compared with taking out a standard mortgage, that doesn’t mean you’re out of options. In fact, an experienced mortgage broker can work with you to improve and strengthen your application before you submit it to a lender.

Can I remortgage?

Yes, you can. By remortgaging, you can borrow money against your property and use the released equity to pay off your debts. Once you do this, your credit report should mark your DMP as ‘settled’. However, it’s unlikely that a mainstream lender will extend your loan with an active DMP as it’s considered high risk – which is where specialist lenders come in.

Will a DMP affect my partner?

If you share a joint financial link such as a mortgage or loan, your partner’s credit rating could be affected by your DMP. However, if your partner is a second card holder on one of your credit card accounts, your DMP will have no effect. If you share any non-priority debts with your spouse or partner, it can be included in your DMP.

It’s also possible to set up a joint DMP. You can do this even if your partner earns a different salary amount to you, or if they have their own debts which they wish to include in the DMP.

If you’re concerned that your spouse or partner may be being affected by your own financial situation, you can request a copy of their credit report. Any financial link affecting you both will show up.

If you want to arrange a mortgage and your partner’s credit record isn’t affected by your DMP, you may need to decide whether you’re better off applying for a joint mortgage with one bad credit applicant, or take out a single mortgage.

Are there any home ownership schemes I could apply for?

If you’re unable to raise enough money to put down as a deposit for your home, there are other schemes you may be applicable for. See below for more information.

Help to Buy

The Help to Buy: Equity Loan scheme is available for first-time buyers as well as homeowners looking to move. You can only buy new builds with this scheme, however, the UK Government will lend you 20% of your property’s value for the first five years of owning your home. You’ll have to contribute a 5% deposit, taking you to 25% in total – meaning that you’ll only have to borrow 75% from a mortgage lender.

Shared Ownership

Also available from the UK Government, the Shared Ownership scheme allows people to buy between 25% to 75% of the property’s value, then you pay rent on the rest. Once you’re able to afford more, you could buy bigger shares.

Mortgages after a Debt Management Plan

Even though a Debt Management Plan may have been settled, It’s really only made easier if you paid it off over three years ago, as this brings more lenders into the picture that are willing to consider your application (even one or two high street lenders if your application is packaged and presented in the right way).

The criteria is loosely the same for those who have only paid their DMP off within the last three years. However, affordability is enhanced when compared to those who plan to keep their DMP after the mortgage has started, and borrowing can be up to 5x income, provided there are no additional large financial commitments.

For those who want a mortgage after a debt management plan they paid off over 3 years ago, there are more lenders willing to consider the application and, as such, rates tend to be naturally more competitive.

If you’ve had other adverse credit issues since the DMP was settled, such as defaults and CCJs, then these will have the biggest impact on which lenders are likely to consider your application.

Generally, when adding default or CCJs to a historical DMP you will be restricted to a handful of specialist lenders that stipulate a maximum of two defaults / CCJs in the last two years up to 85% LTV.  If you’ve had more serious credit issues in the last two years, you may need to put down more deposit (up to 30-35%).

Also, the rates and setup fees are likely to be far less competitive the more recent and severe the adverse credit issues are.

Can I get a secured loan while on a debt management plan?

If you have a current DMP, it may be possible to get a secured personal loan. If the terms of your debt management plan allow you to apply for credit, you will usually be penalised with lower borrowing limits and higher interest rates. If you want to take out a loan to put towards a mortgage deposit, most lenders will turn you away.

Some DMPs prevent you from borrowing more money until you’ve finished the plan. You’ll need to check the terms of your DMP to find out if you’re allowed to borrow more money.

If your plan does allow it, you should always ensure that you never borrow more than you can afford.

Speak to an expert mortgage advisor

If you’re concerned that your debt management plan might stop you from getting a mortgage, speak to a specialist mortgage broker. All the experts we work with are whole-of-market brokers with access to all the high street and specialist mortgage lenders.

Call 0808 189 2301 or make an enquiry and we’ll match you with a broker experienced in arranging mortgages for customers in similar situations. They’ll be happy to answer all your questions and will work with you to find the right mortgage lender for you.

The service is free, there’s no obligation to go further, and we won’t leave a mark on your credit rating.

Updated: 3rd September 2020
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FCA disclaimer

*Based on our research, the content contained in this article is accurate as of most recent time of writing. Lender criteria and policies change regularly so speak to one of the advisors we work with to confirm the most accurate up to date information. The info on the site is not tailored advice to each individual reader, and as such does not constitute financial advice. All advisors working with us are fully qualified to provide mortgage advice and work only for firms who are authorised and regulated by the Financial Conduct Authority. They will offer any advice specific to you and your needs. Some types of buy to let mortgages are not regulated by the FCA. Think carefully before securing other debts against your home. As a mortgage is secured against your home, it may be repossessed if you do not keep up with repayments on your mortgage. Equity released from your home will also be secured against it.