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Mortgages and Overdrafts

See how expert advice could secure your mortgage approval, despite having an overdraft

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Pete Mugleston

Author: Pete Mugleston - Mortgage Advisor, MD

Updated: October 8, 2021

Mortgage lenders aren’t always big fans of overdrafts since being in one can be a sign of financial mismanagement, but it’s still possible to get a mortgage if your bank account is in the red.

To bring you up to speed on how this is possible, we’ve put together this guide to mortgages and overdrafts. Here, you’ll learn when mortgage lenders are happy to overlook overdrafts and what to do if you’ve been declined because you’re in one, and much more.

Does having an overdraft affect getting a mortgage?

Being in an overdraft can negatively affect your chances of mortgage approval, but this isn’t always the case. Whether a mortgage lender will decline your application or penalise you for this will depend on the circumstances surrounding your overdraft, such as…

  • The type of overdraft you have: Unauthorised overdrafts are more problematic than authorised ones as they can be viewed as financial mismanagement. Some mortgage lenders will proceed with caution if they see unauthorised overdraft use, though others might be willing to approve you if these are isolated incidents.
  • Whether you use your overdraft responsibly: If you dip into an overdraft every now and again and can afford any fees this incurs, most lenders will still consider your application, but will include these charges in their affordability assessment.
  • How reliant you are on your overdraft: Being reliant on an overdraft or living in it permanently is a red flag for some lenders, who might conclude that you’re spending beyond your means. There are, however, flexible lenders who may consider offering you a mortgage, with all overdraft charges factored into the affordability assessment.
  • The size of your overdraft: Large overdrafts can make some lenders uncomfortable, especially if you’re regularly in the deep end of them, but they aren’t necessarily a deal-breaker if used responsibly and any charges and fees are affordable.

Not all mortgage lenders view overdraft usage as a reason to decline an application, but if you regularly use one and are applying for finance, it’s important to approach the right lender.

A broker who specialises in mortgages for people in an overdraft will have deep working relationships with these lenders and they can negotiate the best deal with them on your behalf – in other words, it pays to seek their advice.

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.

The amount you get paid each month, after any taxes or contributions have been deducted.
Be sure to include all of your fixed outgoings, as well as any loans or credit card payments you make.
Low Moderate 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.

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What to do if you’ve been declined for a mortgage because of an overdraft

If you were declined for a mortgage because you have an overdraft, this might be simply because you approached the wrong mortgage lender or used the wrong broker. Appetite for risk can vary dramatically across the mortgage market, and it could be that another mortgage provider is more flexible.

The most important thing to remember is that mortgage rejection on overdraft grounds isn’t the end of the road for your plans. Here’s are the steps to take to get them back on track…

  • Don’t delay your plans unnecessarily: Many people in this situation assume their only option is to wait until they’ve cleared their overdraft before re-applying for a mortgage. This might not be the case as there are lenders who could consider offering you a mortgage despite you having an overdraft that’s in use.
  • Let us match you with the right broker: While your plans might be salvageable, you don’t want to rush back out there without professional advice. Approaching another lender at random could mean a second rejection, which could have a negative impact on your credit report and set your homeownership plans back further. But by using our free broker-matching service, you could avoid any further setbacks.
  • Let your broker do the hard work for you: The mortgage broker we match you with will have a strong track record helping people with overdrafts get a mortgage. They will explore whether there are grounds for appeal with the lender who rejected you, but if it’s in your best interest, they’ll find you an alternative lender to apply with.

Get expert advice from a broker if...

  • You regularly use your overdraft
  • You often reach the limit of your arranged overdraft
  • You sometimes use an unarranged overdraft

If you any of the above apply to you and your overdraft, it’s important to get expert advice ahead of a mortgage application.

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Can you use an overdraft for a mortgage deposit?

Not usually. The vast majority of lenders would not be comfortable offering a mortgage to somebody who is using their overdraft to cover the deposit as this would not be considered responsible lending. You’d essentially be using funds you don’t actually have, so most mortgage providers would not be able to offer finance under these circumstances.

If you think that using an overdraft is the only way you can afford a mortgage deposit, it’s a good idea to speak to a mortgage broker to see if there are fallback options available.

In the meantime, you might find our guide to low deposit mortgages useful, or alternately, you can read up on acceptable deposit sources in our guide to mortgage deposits.

Speak to an expert about overdrafts and mortgages

If you’re applying for a mortgage with an overdraft, seeking professional advice before you apply is recommended as approaching the wrong lender could put a dent in your plans. Some mortgage providers are wary of customers with overdrafts, so it’s important to avoid ones who might decline your application or offer you unfavourable rates.

This is where we come in. Our free broker-matching service can pair you up with a mortgage advisor who helps customers with overdrafts secure finance every day. This is their speciality, and they can boost your chances of success – even if you’ve been declined recently – by pairing you up with the lender who’s best positioned to approve you.

Call us today on 0808 189 2301 or make an enquiry and we’ll set up a free, no-obligation chat between you and your ideal mortgage broker today.

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Should I clear my overdraft before applying for a mortgage?

Clearing an overdraft before you apply for a mortgage can be beneficial. If your bank statements are in the black, this can help convince the lender that your financial conduct is good, plus being free of overdraft fees and interest charges can boost your affordability.

That said, keep in mind that clearing an overdraft before you apply for a mortgage is not usually essential. Most lenders will overlook the occasional dip into the red if there’s a good reason for it and are unlikely to penalise you for responsible, authorised overdraft use.

Will an unused overdraft affect my mortgage application?

An overdraft facility you never use or rarely use is far less likely to cause any issues than one that is used regularly, and in most cases, this shouldn’t impact your mortgage eligibility. That said, if you have a large unused overdraft and the lender has any reason to suspect you might end up maxing it out in the future, this could affect your mortgage prospects.

Does having an overdraft affect my credit report?

If you’re in an arranged overdraft, it will appear on your credit report as a debt. Unauthorised overdrafts and charges will also be recorded on there.

The only time this isn’t the case is when you only dip into your overdraft occasionally and it is quickly cleared when your wages enter your bank account. This is because most banks and building societies only update the credit reference agencies once per month, so if you were in the clear when they sent over this information, it might not appear on your file.

Your credit rating is unlikely to be impacted by your overdraft if you use the facility sensibly and pay it off in full. In fact, this can even help you build up good credit history.

About the author

Pete, an expert in all things mortgages, cut his teeth right in the middle of the credit crunch. With plenty of people needing help and few mortgage providers lending, Pete found great success in going the extra mile to find mortgages for people whom many others considered lost causes. The experience he gained, coupled with his love of helping people reach their goals, led him to establish Online Mortgage Advisor, with one clear vision – to help as many customers as possible get the right advice, regardless of need or background.

Pete’s presence in the industry as the ‘go-to’ for specialist finance continues to grow, and he is regularly cited in and writes for both local and national press, as well as trade publications, with a regular column in Mortgage Introducer and being the exclusive mortgage expert for LOVEMoney. Pete also writes for OMA of course!

Read more about Pete

Pete Mugleston

Mortgage Advisor, MD

FCA disclaimer

*Based on our research, the content contained in this article is accurate as of the 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 information 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.

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