If I Clear my Debt can I get a Mortgage?

Trying to get a mortgage whilst paying off debt can be a frustrating process, but don’t worry; you’re not alone!  Every month, over 170,000 people come to us for guidance on debt solutions. We understand your worries about how debt could impact your dream of owning a home.

In this easy-to-understand guide, we’ll explain:

• The link between debt and getting a mortgage.
• How debt-to-income ratio is calculated.
• The impact of different types of debts.
• Government schemes and assistance available for homebuyers.
• Debt solutions to make your mortgage application stronger.

We know it can be tough to handle debt and think about a mortgage at the same time. But remember, we’re here to help. We have the expertise to guide you through the process and answer your questions. So, let’s start this journey together and make your dream of owning a home come true.

Debt and mortgage applications

To be approved for a mortgage, you must prove to the lender that you can afford to repay the mortgage comfortably. Various stress tests and affordability tests are used to check whether you will be able to repay now and in the future. 

Mortgage underwriters will include a debt-to-income assessment, where they factor in your existing debt repayments to their decision. They’ll also look at your credit file and check your credit score. 

How is a debt-to-income ratio calculated?

The debt-to-income ratio will be part of your mortgage application assessment. It is calculated by adding together all of your monthly debt repayments and then dividing this amount by your gross monthly income. 

Can I get a mortgage if I’m in debt?

It is possible to get approved for a mortgage if you have outstanding debts elsewhere. The mortgage lender will include any existing credit repayments when assessing you for a mortgage. Many people get approved for a mortgage with outstanding debts, such as loans, credit cards and other mortgages. 

This is not the same as having debt arrears. If you are already behind on debt repayments with other creditors, you could still be approved for a mortgage, but it will be more difficult. Not only will you have debts to repay, but having arrears is likely to have reduced your credit score, which could make you less appealing to the mortgage provider. 

In some cases, it could be a subprime lender who charges higher interest that will accept your application.

Government schemes and assistance

In the UK, numerous government schemes aim to assist first-time homebuyers and those who may face challenges due to existing debts in securing a mortgage to purchase a property.

Help to Buy: Equity Loan

The Help to Buy: Equity Loan scheme is targeted at first-time buyers. The government lends buyers up to 20% (or up to 40% in London) of the cost of a newly built home, meaning the buyer only needs a 5% cash deposit and a 75% mortgage to make up the rest.

Shared Ownership

The Shared Ownership scheme allows first-time buyers to buy a share of a property (between 25% and 75%) and pay rent on the remaining share. This often requires a smaller deposit than buying outright. Later, the buyer can increase their share during their time in the home.

Lifetime ISA

A Lifetime ISA allows people aged 18 to 40 to save up to £4,000 annually, with the government adding a 25% bonus to these savings. The funds can be used to buy a first home or saved for later life. This could be particularly helpful for those trying to save for a deposit while managing debt by providing a bit of a boost to their savings.

Right to Buy

Right to Buy enables council tenants to buy their council home at a discount. The length of time they have been tenants, the type of property, and the value of the home all influence the discount. The Right to Buy scheme could be suitable for those who have managed their rent well but may not have a large deposit saved.

Stamp Duty Land Tax (SDLT) Relief

There is also a relief on Stamp Duty Land Tax for first-time buyers. Properties up to £300,000 are exempt from SDLT, and for properties costing up to £500,000, no SDLT is paid on the first £300,000. This reduces the upfront cost of buying a home.

Mortgage Guarantee Scheme

This scheme is aimed at helping people with a smaller deposit get a mortgage. The government provides a partial guarantee (up to 15%) to lenders on mortgages with a 5% deposit to encourage lenders to offer mortgages to those with smaller deposits.

Debt Solutions

• Individual Voluntary Arrangement (IVA): An IVA allows the debtor to make a formal agreement with creditors to pay back their debts over a set period, making it more manageable.
• Debt Relief Order (DRO): For those with lower levels of debt and few assets, a DRO can pause repayments and interest for a year.

How much debt is acceptable for a mortgage application?

There is no fixed amount of debt that is accepted when making a mortgage application. In fact, each mortgage lender can apply its own debt-to-income ratio, and the outcome of your application will be based on more than just how much debt you have. 

It is recommended to speak with a mortgage expert to uncover what type of loan could be possible with your level of existing debt.

Impact of Different Types of Debts

Lenders scrutinize the types of debt you have, the outstanding amounts, and your management of these debts when assessing your application.

• Credit card debt: Lenders typically view credit card debt with scrutiny because it’s often considered as revolving debt. It can indicate spending habits and financial discipline. Prioritising paying off high-interest credit card debt not only alleviates financial burden but can also improve your credit score and make you a more favourable candidate for a mortgage.
• Personal loans: Personal loans are often seen in a slightly more positive light if they are being handled well because they are usually fixed-term debt. If you’ve taken personal loans, ensuring consistent and timely repayments will portray financial responsibility, potentially making lenders more confident in your ability to manage a mortgage.
• Student loans: In general, UK lenders tend to be more forgiving towards student loans as they are seen as an investment in your future. Make sure to account for student loan repayments in your affordability assessments, ensuring they won’t adversely affect your ability to manage mortgage repayments.
• Car loans: A car loan is typically a secured loan and may have less impact if you’re managing it well. However, large monthly payments could affect your debt-to-income ratio. A maintained repayment record on car loans will reflect well, though it might be prudent to pay it down as much as possible to free up monthly income for mortgage repayments.
• Overdrafts: Regularly using your overdraft can signal to lenders that you are living beyond your means, which may raise concerns. Try to manage your finances so that your use of overdrafts is minimal or non-existent in the months leading up to your mortgage application.
• Payday loans: Payday loans are often viewed negatively by mortgage lenders as they may suggest financial mismanagement. If possible, avoid using payday loans, especially in the lead-up to a mortgage application. If you have used them in the past, ensure they are paid off and work towards improving other areas of your financial profile.

If I clear my debt can I get a mortgage?

Clearing your debt does not guarantee you will be approved for a mortgage. It could improve your personal finances, which improves the strength of your mortgage application, but the lender can still reject you even if you paid off all your debts. 

If you have a lower income, you might be rejected unless you can secure a guarantor. Use my free guarantor mortgage calculator below to take a look at how a product like this can affect your finances.

Whether you get approved for a mortgage or not will depend on an array of factors and not just if you have debts or not. It is best to seek advice from a professional mortgage adviser if you are unsure. Sometimes, you can get free mortgage advice from brokers. 

Is it best to pay off all debt before buying a house?

Paying off your debts before making a mortgage application could improve your chances of getting approved. This is because reducing or clearing your debt will improve your debt-to-income ratio, which is part of the mortgage assessment. It could also improve your credit score. 

But it might not be necessary or beneficial to clear your debt before applying for a home. 

Should I clear my debt before applying for a mortgage?

The decision to clear your debts before applying for a mortgage or not should be based on individual circumstances. Paying off your debts may strengthen your application, but so could using that money to put down a bigger deposit. 

If you choose not to pay off your debts and use the money to increase your deposit, your application could be stronger than if you cleared or reduced your debt. You should weigh up the pros and cons based on your personal situation for the answer. Get help from a mortgage advice company if needed. 

How long after clearing the debt can I get a mortgage?

Although you can be approved for a mortgage with debt, it is often recommended to wait three to six months before applying for a mortgage after paying off your debts. This is recommended to protect and improve your credit score. 

But it is still possible to apply successfully with existing debts or just after paying off your debts. It all comes down to individual circumstances. 

If you are applying for a mortgage after paying off credit arrears that have damaged your credit score, you might want to wait until your credit score has recovered before making an application rather than waiting a set amount of time. 

Credit Repair Strategies

Actively working to repair your credit to strengthen your mortgage application is a prudent step, especially in the UK, where a good credit score can significantly impact your mortgage prospects. Here are some strategies:

1. Obtain and Scrutinise Your Credit Report: Secure a copy of your credit report from major UK credit reference agencies: Experian, Equifax, and TransUnion. Ensure all the information is accurate and dispute any inaccuracies you might find.

2. Register on the Electoral Roll: Being on the electoral roll makes it easier for lenders to verify your identity and address.

3. Manage Your Current Debts Wisely: Ensure all bills and existing debt repayments are made on time and only utilise credit that you can afford to repay.

4. Maintain Healthy Credit Use: Try to maintain your credit use below 30% of your available limit and be cautious with new credit applications, as numerous requests can negatively impact your score.

6. Deal with Past Defaults and Debts: Talk to creditors about potentially re-ageing older accounts. If possible, settle defaulted accounts or negotiate a settlement figure.

Should I use an adverse credit mortgage broker?

Aspiring mortgage applicants with poor credit history could use a mortgage broker who specialises in helping people with poor credit to get a mortgage. Many standard brokers can also offer this service. You are never forced to use a mortgage broker at all.  

Can I get a mortgage if I pay off my debts? (Quick recap)

It is possible to get approved for a mortgage if you have debt or if you have paid off your debts. The lender will decide on your application by looking at your debt-to-income ratio, but they will also make their decision on several other factors. You should seek mortgage advice services for a personalised assessment and guidance. 

Find ways to pay your debt off here

If you have decided to clear your debts before applying for a mortgage but are struggling to make repayments, you may want to consider debt solutions. There are many ways to get out of debt comfortably, such as a Debt Management Plan. Learn about all the possible solutions on this dedicated page.