Most bank accounts these days come with an overdraft facility so simply having one shouldn’t be problematic. The size of your overdraft, however, and how much of it you use each month could negatively impact your application.
In this comprehensive guide, we explain 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 very 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 start to get a bit trickier if you have a large overdraft and rely on it regularly. Lenders may see this as a sign you’re living beyond your means or that you 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’re able to borrow. Often these overdrafts come with interest-free buffers meaning you can use them without having to pay any interest.
Most mortgage lenders will accept a well-managed, authorised overdraft of around £200-£1,000, as long as you’re not deemed to be 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 is when you spend more than you have in your current account or you go over your authorised limit without your bank signing off on it first. Charges on these can be very high.
Mortgage lenders tend to take a more critical view of unarranged overdrafts, especially if you regularly borrow multiple thousands of pounds.
If you go into your unarranged overdraft often, you may have to use a specialist bad credit mortgage lender. A broker who has experience arranging mortgages in these circumstances will be able to help you.
Get advice from an overdraft and mortgages expert
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. If your credit report shows you regularly fall deep into an unauthorised overdraft, that’s a red flag that you’re struggling to manage your finances, and it could indirectly affect how much you’re able to borrow or even whether a lender will accept your application at all.
If you regularly max out your authorised overdraft, this could also be cause for concern. Lenders will probably ask for an explanation during the application process and you may be able to borrow less as a result, or be offered a less competitive rate.
A small, well-managed, authorised overdraft, shouldn’t be a problem. In fact, it could be a positive as it shows lenders you’re a reliable borrower, but keep in mind that any overdraft fees will be factored into your affordability assessment and classed as an 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. This is because you could use it later down the line 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 who specialises in helping borrowers with bad credit. They can advise 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. Get in touch and we can arrange for an expert to contact you directly.
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Debt to Income Ratio calculator
When carrying out their affordability checks, lenders calculate your debt-to-income (DTI) ratio. This shows how much debt you owe each month compared to how much you earn. It’s useful to know your DTI ratio before applying for a mortgage to see 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.
Debt to Income Ratio Calculator
You can use our debt-to-income (DTI) ratio calculator to work out how much of your income is going towards your fixed outgoings, expressed as a percentage. Based on that percentage, this tool will tell you whether mortgage lenders will class your DTI as low, medium or high.
Your Debt to Income Ratio is %
Good news! Most mortgage lenders will class your debt-to-income ratio as low. You’re unlikely to be declined for a mortgage based on your outgoings, but speaking to a mortgage broker before applying is still recommended as they can improve your chances of getting the best deal.
Most mortgage lenders will class your debt-to-income ratio as moderate, which means some of them might view your application with caution. Some lenders are much more strict than others when it comes to affordability and debt, so it’s important for you to find a lender who’s more lenient. You should speak to a mortgage broker before you apply to ensure you’re matched with a lender whose criteria you fit.
Most mortgage lenders will class your debt-to-income ratio as high. But that’s where we can help! With so much of your monthly income going towards debt repayments, you could struggle to get approved for a mortgage without the help of a mortgage broker. We can help you find a lender who’s more lenient on debt and affordability, and could still secure a mortgage approval.
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 in your quest 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. Take a 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 be able to 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 and the underwriter will look at your overdraft.
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Get matched with a specialist broker today
If you regularly fall into your overdraft, a broker can be the difference between getting accepted for a mortgage or rejected.
You’re best off seeking advice from a broker who specialises 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.
Give us a call on 0808 189 2301 or make an enquiry and get matched with an expert today for a free initial conversation.
Yes. All overdrafts, whether authorised or unauthorised, are a type of loan so you need to be confident that you can afford to pay the money back, plus any fees and interest, if you decide to use one.
Yes. If you regularly stray into your unauthorised overdraft, this could damage your credit rating, which in turn can make it harder to access other forms of credit in the future.
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