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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: 24th June 2020*

Many people have turned to payday loans as a short term fix to a pressing problem, from urgent car repairs to emergency boiler maintenance, but using this form of high-interest debt could hurt your chances of getting a mortgage.

Lots of mortgage lenders will decline your application if you’ve ever used a payday loan, especially if you took one out recently, but with the right advice, options could be available.

Our guide to getting a mortgage after a payday loan covers the following topics…

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Can I get a mortgage if I’ve used payday loans?

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 in credit history 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.

Can mortgage lenders see payday loans on my credit file?

Your payday loan is likely to come to light during the credit checks for your mortgage, and there’s also the chance they could see evidence of it when you provide them with bank statements.

Moreover, you should declare your payday loan usage in advance if you’re applying for a mortgage, as this is information the lender will need to know.

How long does a payday loan stay in my credit history?

Your credit history will show any borrowing you take or payments you miss over the last six years. 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. Payday loans will show in your credit history 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.

If you have had a loan from any of the following lenders, they will appear as one of the terms mentioned above on your credit file: Wonga, Provident, Lending Stream, Sunny, Swift Money, QuickQuid, PaydayUK, Cash Float, Mr Lender, Pounds to Pocket, Piggy Bank and many others.

How long 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 Number of lenders accepting payday loan use over 12 months ago Number of lenders accepting payday loan use inside the last 12 months
95%+ 3 3
85-95% 7 5
75-85% 11 7
Under 75% Plenty 11

Note: The information in this table is accurate as of October 2019, 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.

Do payday loans increase your credit score for a mortgage?

No! Although credit scores offered by the main credit reference agencies such as Experian, Equifax and Call credit can increase if you actively take payday loans and have a track record of repaying them on time, having a payday loan on your file will not help you get a mortgage.

Reputable mortgage lenders will take a thorough look at your records in context and take note that your reference agency scores are higher because of payday loan use, which they take a dim view of.

Moreover, keep in mind that some mortgage providers don’t use credit scores at all. They simply search your report for the presence of adverse credit and will likely spot your payday loans during this process.

How much do payday loans negatively impact your credit score?

They can certainly hurt your chances of getting a mortgage to buy a house, or any other type of property for that matter.

Mortgage lenders 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 like payday loans?

Regular payday loan use can cause issues with potential mortgage lenders, as underwriters can consider it 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 providers 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 high street providers simply suggesting that you ‘make an application and see’ – not helpful advice.

How will a payday loan affect my mortgage application?

Mortgage applications under these circumstances 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 goto 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 them to charge higher rates and fees 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.
  • Affordability:
    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 4.5x 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 applicant 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.

What to do if you’ve been refused a mortgage because of a payday loan

The way to avoid being declined again is to apply to the right lender this time, one who knows about and is accepting of the payday loan upfront. It’s vitally important that you don’t go direct to another mortgage lender who declines payday loan users outright because too many applications in a short space of time can impact your credit file.

Such lenders can be difficult to find, especially if you’re hoping to secure the most favourable interest rates, and this is why you should always start by speaking to a whole-of-market broker.

The advisors we work with have access to every lender in the business, including specialist providers who take a flexible approach to customers with payday loans on their files. They can introduce you to the lender who’s best positioned to offer you a table-topping deal, despite your credit issues.

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.

Make an enquiry and we’ll connect you to the right expert today.

Getting a mortgage with bad credit after payday loans

This may be possible but if you have bad credit and payday use on your credit report, things can be more complicated. This is because you will fall into two high-risk categories so therefore your choice of approachable lenders will be fewer.

Generally, payday loans and bad credit are viewed in the same light by mortgage lender – if you have used a payday loan, even if repaid on time, it is considered by mortgage lenders as an issue.

Getting a mortgage with credit problems such as late payments, defaults, CCJs, in debt management plans, IVA’s, and after a bankruptcy or repossession is potentially 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.

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.

Can I get a mortgage with a payday loan default?

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 it was over 12-24 months ago, you have a much better chance.

Speak to an expert

Your likelihood of getting a mortgage with favourable rates will increase dramatically if you apply through a specialist broker who understands payday loans and their potential impact on an application.

Call 0808 189 2301 or make an enquiry and we’ll connect you to one today!


Updated: 24th June 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.