Does An Overdraft Affect Your Mortgage Application?

One of the biggest misconceptions about applying for a mortgage is that you’ll struggle to get approved if you have an overdraft, but that’s not necessarily the case.

Nowadays, most bank accounts come with an overdraft facility, so simply having one shouldn’t be problematic. However, the size of your overdraft and how much of it you use each month could negatively impact your application.

This comprehensive guide explains everything you need to know about mortgages and overdrafts, including what to do if you’ve been rejected and how a broker can help. Read on for more information or jump to the section that’s relevant to you via the links below…

Can you get a mortgage if you have an overdraft?

Yes, of course you can. If you have an overdraft facility but never – or rarely – use it, you shouldn’t have any problems (as long as you meet all other eligibility requirements). You also shouldn’t have any trouble if you occasionally dip into your overdraft but pay it off in full each month.

Things get a bit trickier if you have a large overdraft and rely on it regularly. Lenders may see this as a sign that you’re living beyond your means or have trouble managing your finances, which could affect eligibility.

Whether your overdraft is arranged or unarranged can also make a difference.

Arranged vs. unarranged overdrafts

An arranged overdraft is an amount you’ve pre-agreed with your bank that you can borrow. Often, these overdrafts come with interest-free buffers, meaning you can use them without paying interest.

Most mortgage lenders will accept a well-managed, authorised overdraft of around £200-£1,000 if you’re not deemed too heavily reliant on it. Anything above this could be considered a high overdraft and might be frowned upon by a lender.

An unarranged overdraft occurs when you spend more than you have in your current account or go over your authorised limit without your bank signing off on it first. Charges for these can be very high.

Mortgage lenders tend to take a more critical view of unarranged overdrafts, especially if you borrow thousands of pounds regularly.

You may have to use a specialist bad credit mortgage lender if you go into your unarranged overdraft often. A broker who has experience arranging mortgages in these circumstances will be able to help you.

How overdrafts affect your application

In the worst-case scenario, your mortgage application could be rejected.

Overdrafts appear on your credit report as debt and lenders use this information to assess how reliable you are as a borrower. Suppose your credit report shows you regularly fall deep into an unauthorised overdraft. In that case, that’s a red flag that you’re struggling to manage your finances, and it could indirectly affect how much you can borrow or even whether a lender will accept your application.

If you regularly max out your authorised overdraft, this could also cause concern. Lenders will probably ask for an explanation during the application process, and you may be able to borrow less or be offered a less competitive rate as a result.

A small, well-managed, authorised overdraft shouldn’t be a problem. It could be a positive as it shows lenders you’re a reliable borrower. However, remember that any overdraft fees will be factored into your affordability assessment and labelled as outgoing.

What if an overdraft is never used?

Having a small, untouched overdraft shouldn’t be an issue. However, a large overdraft that you never use could concern some lenders. You could use it later and increase your outgoings and debt.

If you have an overdraft you don’t use, it may be worth cancelling or reducing it before making your application.

How a broker can help with your application

Using an overdraft – even an unauthorised one – doesn’t mean you can’t get a mortgage. It just means you may need to use the services of a specialist lender.

The best way to find the right lender is to use a broker specialising in helping borrowers with bad credit. They can advise you on which lenders to approach and which to avoid, saving you the stress and expense of wasted applications.

They can also secure the best rates, negotiate with lenders on your behalf and get access to exclusive deals.

We have brokers in our network who specialise in securing mortgages for people deep into their overdraft. Contact us, and we can arrange for an expert to contact you directly.

Debt to Income Ratio calculator

Lenders calculate your debt-to-income (DTI) ratio when carrying out their affordability checks. This shows how much debt you owe each month compared to how much you earn. Knowing your DTI ratio before applying for a mortgage is useful in determining whether lenders will classify you as a low-, medium-, or high-risk borrower. This can help you and your broker determine which lenders to approach.

What to do if your application is declined

If your application has been rejected because of your overdraft, don’t panic. There could be a simple explanation, such as you’ve approached the wrong lender. You don’t need to put your mortgage plans on hold until you’ve paid off all your overdraft.

Here are a few actions you can take…

Speak to a broker

A specialist broker will be able to tell you which lenders to approach, and they’ll also be able to help you with your application. Remember, every rejection is marked down on your credit report, so it’s important you don’t send out multiple applications at once while you are waiting to be accepted.

Try to stay within your authorised overdraft limit

As mentioned above, lenders favour authorised over unauthorised overdrafts, so try to stay within your authorised overdraft limit. Look at your finances and see if there are any outgoings you can cut back, such as old subscriptions or memberships you no longer use.

Consider consolidating your debt.

In some circumstances, converting a large overdraft into a personal loan can make it easier to manage your debt. It will probably cost you a lot less, and you’ll have a set date for when the debt will be cleared. It also shows potential lenders that you’re serious about managing your finances. Just remember to cancel your overdraft if you go down this route.

Can you use an overdraft towards a deposit?

No, usually not. Most lenders will frown upon applicants who have to borrow money to fund an even bigger debt.

A side note. If you think you’ll get away with using your overdraft as a deposit without your lender’s knowledge, think again. During the application process, your lender will ask you for evidence of where the funds for your deposit came from as part of their anti-money laundering duties. The underwriter will look at your overdraft.

Get matched with a specialist broker today

If you regularly fall into your overdraft, a broker can be the difference between being accepted for a mortgage and being rejected.

You’re best off seeking advice from a broker specialising in helping borrowers with large overdrafts secure finance. Our broker matching service can connect you with the perfect expert who will help turn your dream of home buying into a reality.

Call us on 0330 818 7026 or make an enquiry and get matched with an expert today for a free initial conversation.