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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: 25th August 2020*

If you have a personal loan, you may be wondering how it could affect your chance of being approved when applying for a mortgage.

A personal loan will always have an impact on your mortgage affordability, as lenders will check your credit score and financial outgoings to see whether you can afford the monthly mortgage payments.

So whether you have a personal loan, want to borrow against your mortgage, or just want to consolidate debts using a mortgage, it’s important to understand what the long-term repercussions for your financial health could be.

In this article, we’ll cover:

Do personal loans affect mortgage applications?

Yes. Mortgage lenders will take all of your debts into account when deciding whether you are eligible for a mortgage and how much you can borrow.

They’ll look at your credit history when judging whether or not you’ll be able to afford the monthly repayments.

Debts unrelated to the mortgage, will play a big part in how your application is viewed since you’re already using some of your income to maintain and pay off this additional debt.

If you want to apply for a mortgage and you don’t currently have any outstanding personal loans, Most experts will recommend avoiding getting one right before applying for a mortgage, if possible.

Taking on a personal loan in the three months before applying for a mortgage could affect your credit score and lead to your mortgage application being rejected.

To be absolutely sure you won’t be rejected for a mortgage due to personal loan debt, some brokers recommend leaving a six-month gap between getting a personal loan and applying for a mortgage.

Applying for these loans can impact mortgage affordability

Getting a personal loan, or even applying to find out if you could get a personal loan will leave a mark on your credit file, which lenders will see when they assess your mortgage application.

Applying for any of the following loans will register a mark on your file:

  • Personal loan
  • Car finance
  • Credit card
  • Overdraft
  • Mobile phone contract
  • Utility contract

The higher the volume of searches recorded in a small window of time, the less likely you are to be approved for a mortgage.

If you MUST apply for credit, it’s possible that a single application won’t harm your record, as long as you ensure you can afford it.

However, if you’ve taken on a payday loan in the twelve months preceding your application for a mortgage, some lenders might decline you.

What’s the difference between a personal loan and a mortgage?

A personal loan is a loan from a bank or other lender which is not secured against an asset. Loans like this are sometimes referred to as unsecured loans.

A mortgage is a loan used to buy property or land. Unlike personal loans, a mortgage is secured against the perceived value of the property until the loan is repaid in full.

Can you get a mortgage if you have a personal loan?

Yes! Although lenders will take any existing debts into account when assessing your mortgage application, having a personal loan shouldn’t prevent you from getting a mortgage.

When looking at outstanding debts, mortgage lenders will be assessing whether you can afford to take on additional finance. So, if you have personal loan debt you’ll need to prove that you can repay all your debts.

Not all lenders assess your mortgage applications the same way. To get the best mortgage deal when you have personal loans to repay, talk to a whole-of-market broker, like the ones we work with.

Whole-of-market brokers have access to mortgage lenders across the UK and know the lenders who will accept borrowers with personal loans already in place.

A specialist broker will know which lenders are most likely to accept your mortgage application and can help make sure your application is successful and you don’t risk any negative impacts on your credit rating.

How could my personal loan improve my mortgage application?

If you’re strategic about it, sometimes a personal loan can actually help your mortgage application. To turn personal loans in your favour, you need to take the long view.

There are a couple of ways you could use personal loans to help your future mortgage application:

  1. Having a personal loan and making repayments on time will actually boost your credit ratings since it’s proof that you’re responsible. Some experts would actually recommend you make some form of debt or credit repayments in the months leading up to applying for a mortgage to benefit from the upkick a repayment can make to your credit score.
    If you have the funds available you should consider paying off a credit card or personal loan in full, ahead of making your mortgage application.
  2. Use a personal loan to re-organise and refinance expensive credit card debts or other personal loans.
  3. Use a personal loan to benefit from high interest rates. Get a loan, put the cash in a high interest savings account and then use the accrued funds to pay for your mortgage deposit. We look at this approach in more detail in the next section.

In summary, there’s no reason why your personal loan should prevent you from getting the mortgage you want – as long as you can afford additional debt, and the loans weren’t taken out in the three months preceding your application.

Can you use personal loans for a mortgage deposit?

If you want to play the long game with a strategic approach, you could consider using a personal loan as a mortgage deposit.

Not all lenders will accept a personal loan as a deposit against your mortgage, but others may not have a problem with it. A whole-of-market broker, like the ones we work with, will know which lenders will accept this use of personal loans and can help you get the best deal available.

If you are considering this approach you should:

  • Ensure you can afford the debt on the personal loan as well as the mortgage you want to take on. It’s a good idea to talk to a mortgage broker ahead of committing to a loan that might not play in your favour.
  • Take out the personal loan several months before you make a mortgage application. Some mortgage lenders will want to know that the money used for your deposit has been sitting in a bank account for several months before its used as your mortgage deposit.

Work with an expert to avoid impact to your credit rating

Applying for a personal loan leaves a mark on your credit file, which the mortgage lenders will see when they assess your application. A mark against your file could play against you if you take on a personal loan three months before making a mortgage application.

If you have to apply for more than one personal loan because of a rejection the first time around, the marks on your credit file could count against your mortgage affordability.

Making several credit applications over a short period of time can also affect your credit rating and raise concern amongst mortgage lenders. And if you are rejected for a mortgage, it can reflect badly next time you apply.

The brokers we work with are whole-of-market with access to lenders across the UK. They will know which lenders will accept your mortgage application, even if you have outstanding loans.

Getting a personal loan after you’ve received mortgage approval

Taking on extra borrowing when you’ve received a mortgage approval isn’t a great idea.

If at all possible, you should avoid applying for any loans, credit cards or additional finance before you’ve fully secured your mortgage.

If your mortgage lender decided to re-run a credit check for any reason, any new application for credit would show up as a potential red flag.

If your lender thought your new credit agreement could impact, your mortgage repayment, they could decide to withdraw the mortgage offer.

Getting a personal loan after you’ve received a mortgage offer

Taking on additional debt when you’ve received a mortgage offer isn’t a good idea.

Your mortgage lender could consider a new personal loan a threat to your ability to repay your mortgage and could lead to your lender withdrawing your mortgage offer.

If you’re considering taking on another credit agreement during or after the mortgage application process, talk to your lender to see if this will affect your application.

Getting a personal loan after mortgage completion

Once you’ve completed on your mortgage and moved into your new home, you’ll probably find yourself spending money on refurbishing your home, which can all add up to significant cost.

Unless you have an extra budget to meet these expenses, you may find it necessary to use credit or personal loans

As a homeowner with a mortgage, you should be able to get a personal loan as long as you can afford the repayments. However, if you can wait a few months before making larger purchases, the time elapse between taking on your mortgage and applying for new credit should play in your favour.

Additionally, many furniture, carpet and electrical stores offer 0% finance deals to help customers afford the goods they sell. But,  you could face high costs if you still have outstanding money owed when the 0% period ends – so budget wisely.

Can I add my personal loan to my mortgage?

Yes, in practice, it is possible to add your personal loan to your mortgage, but there are many things to consider before doing so.

It may be tempting to want to consolidate your personal loan or other debts into your mortgage, but be sure to speak to an expert before making any big decisions on this.

Here are some things to consider before committing to more mortgage debt:

  • Do you have available equity for further borrowing?
    If you borrow against your mortgage, you’re borrowing against what your property is worth. You would need enough equity in your property to borrow more money against it, otherwise borrowing more is likely to be very expensive or incredibly difficult to arrange
  • Does your mortgage agreement allow you to borrow more without incurring additional costs?
    Some mortgage terms don’t allow further borrowing, and even if they do , you’ll likely  incur an extra fee. Any fees or associated admin costs will be added to the loan and increase the total sum borrowed. This will affect the interest you pay and increase your monthly repayments.
  • Would you need to remortgage?
    If you’d end up needing a new mortgage to borrow more money then there would be additional costs involved. For example, exiting your current mortgage arrangement is likely to involve fees or penalties that may make the change prohibitively expensive. Fixed rate mortgages have particularly strict rules about leaving early, and you could be subject to costly early repayment charges.
  • How much would adding your personal loan to your mortgage cost?
    Spreading the cost of a small personal loan over the term of a mortgage may prove to be a lot more expensive than you might think. See the chart below for an idea of just how much.
    If you’re seriously considering adding a personal loan debt to your mortgage you should talk to your mortgage lender and ask how much you can borrow and what it would cost.

Personal loans versus mortgages

If you’re weighing up the options of borrowing more money against your mortgage or taking out a personal loan, read on to find out how loans compare with mortgages.

Personal loan or mortgage loan?

Since mortgage loans are usually repaid over a long period, your monthly repayments on a mortgage loan are likely to be cheaper than monthly personal loan repayments.

For example, a personal loan of £10,000 at an interest rate of 8% over 2 years is going to cost you around £450 each month.

The exact same £10,000 debt, on a 20 year mortgage, at an interest rate of 6% would cost approximately £70 a month.

But remember, because you’ll be paying this additional £70 over a far longer duration, ultimately you’d end up £6,000 out of pocket because even though you’ve got a 6% interest rate, this interest rate is with you for the duration of the outstanding loan.

Sum BorrowedInterest RateTermMonthly RepaymentTotal Repaid
Personal Loan£10,0008%2 Years£450£10,800
Mortgage£10,0006%20 Years£70£16,800

Personal loan or extend mortgage?

The most important thing to remember when taking on a loan or extending your mortgage is how much you’re borrowing and over what period of time.

Decide on the length of your loan repayment term; ultimately it’s this timeframe which will impact how much overall interest you pay.

You need to decide how much you can afford to repay each month. If you can repay the debt over five years, rather than 20 or 25 years, then you would almost certainly better off with the personal loan.

Although personal loans cost more on a monthly basis, they run for a shorter time and are paid off sooner than your mortgage would be.

Even with the reduced interest rate you can achieve with a mortgage compared with the rate on a personal loan, generally the mortgage repayment term will be far longer and so you’ll end up paying significantly more interest.

But having a small personal loan wrapped in a 25-year mortgage would be expensive, so if you need a long repayment period, an extended mortgage may be better.

Personal loan or second mortgage?

Whether you’re looking at a personal loan or a second mortgage, the exact interest rate you’ll be offered will depend on your situation.

A lender will look at your credit history:

  • A clean credit history and a lower loan to value (LTV) mortgage on your property, will mean you’re considered lower risk and are likely to get a better rate.
  • A poor credit history and a higher loan to value against your property will mean you’re more likely to be offered a higher rate and considered high-risk

As well as factoring in the debt repayments on a second mortgage, you may also have to pay additional costs and fees.

These costs might include:

  • Set up fees or arrangement fees
  • Broker fees
  • Legal costs
  • Survey fees

There may also be costly charges for early repayment.

The main advantage of loans secured against your mortgage is that they usually allow longer repayment terms, which in turn helps to maintain your regular repayments at an affordable cost.

However, in keeping the monthly repayments more manageable, the downside is that you end up paying far more interest over the duration, which ultimately ends up costing a lot more than you might first imagine.

The service is completely free and there’s no obligation or marks to your credit rating.

Business loans and mortgages

Depending on the circumstances, business loans can sometimes be a useful alternative to a commercial mortgage.

You may want to consider a business loan if:

  • The amount you need to borrow is less than £25,000. As a general rule, due to the legal and administrative costs involved in setting up a commercial mortgage, it rarely makes economic sense to borrow less than £50,000. Some lenders also have minimum loan requirements when it comes to commercial mortgages.
  • You want to borrow on an unsecured basis. Whilst business loans are an unsecured loan, business mortgages are arranged as a secure loan against a property.
  • You wish to repay the debt in three years or less and have a workable strategy to achieve this goal. If you were in a position to do this, you may also want to consider using a commercial bridging loan. While you can sometimes find secured business loans which allow you to borrow more than £25,000, they aren’t usually considered a viable alternative option to a commercial mortgage due to the higher rate of interest rates you’re likely to be charged.

Speak to an expert about mortgages and personal loans

Whether you want to know if a personal loan you already have may hinder your success when applying for a mortgage, or you want to understand the implications of adding an existing personal loan to a mortgage, we can introduce you to someone who can help.

The mortgage brokers we work with are whole-of-market with access to mortgage lenders across the UK.

To talk to an expert mortgage broker about your mortgages and personal loans queries, call us on 0808 189 2301 or make an online enquiry.

Updated: 25th August 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.