Updated: Nov 23
If you’re planning to apply for a mortgage, it’s normal to wonder how your existing credit – including any overdrafts – might impact your credit score and therefore your mortgage application. Does using an overdraft affect my credit score? Does being in your overdraft affect the mortgage application process? The good news is that having an arranged overdraft facility isn’t going to automatically count against you in your mortgage application. In fact, around 26 million Brits regularly use overdraft services.
When it comes to assessing your overdraft usage, most mortgage lenders will typically look at how often you use your overdraft, whether you regularly go over your overdraft limit, and if you’ve ever gone into an unauthorised overdraft to pay for bills or other expenses.
In this article, we’re going to explain how an overdraft affects your mortgage application, how you can build a high credit score, and how you can secure the mortgage that you want – even if your first application was rejected.
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What is an overdraft?
An overdraft is a way for you to borrow money from your bank without having to apply for a loan or credit card. Typically, you’ll have an authorised overdraft limit attached to your bank account; this can be anything from £100 to £10,000 (or potentially more).
Most adults are eligible to apply for an overdraft with their bank, although the overdraft limit will usually be determined by your income, age, and credit score. Many people find overdrafts useful when they need to fork out for a large expense, such as moving home, redecorating, or paying for a wedding.
While some overdrafts might come with fee-free periods, you’ll usually pay daily interest for every day that you use your overdraft. Unlike a credit card, you won’t be obliged to pay off your overdraft on a monthly basis. However, letting your overdraft fees build up can negatively impact your finances, and even hinder your ability to get a mortgage. While an overdraft facility typically doesn’t impact your credit report, mortgage lenders will take any overdrafts into consideration when reviewing your mortgage application.
Does an overdraft affect a mortgage application?
So, will having an overdraft affect your mortgage application? Not necessarily; you can have an overdraft facility and still get approved for a mortgage without a problem. In fact, in some cases, using an overdraft can help prove your credibility when it comes to handling money.
So, what do lenders assess if you have overdraft facilities? Typically, mortgage lenders will take a look at your overdraft use and analyse the following factors:
The size of your overdraft
If you have a large overdraft and it rarely gets used, this is going to be a massive plus for any mortgage lender. This shows that you don’t rely on credit to pay your bills, and also demonstrates that your bank trusts you enough to give you a large overdraft.
Unauthorised overdraft use
One thing lenders will look out for is whether or not you’ve ever gone into an unauthorised overdraft. An unauthorised overdraft means that you went over the overdraft limit put in place by your bank account. If a lender sees that you regularly go into an unauthorised overdraft, this will affect your credit score and they may be much less willing to sign off your mortgage application.
How often you use your overdraft
If a lender sees that you often rely on your overdraft, or that you’ve frequently used your overdraft to pay bills or other essential expenses, they might think that you’re struggling financially. This might make them unwilling to offer you a loan, as they might doubt your ability to make your mortgage repayments each month.
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Should I clear my overdraft before I apply for a mortgage?
If you’re planning on applying for a mortgage, it’s a good idea to clear your overdraft before submitting your application. Clearing your overdraft will make you a more desirable candidate for a mortgage (which, don’t forget, is effectively a substantial loan) and boost your chances of your mortgage application being accepted. Here are just a few reasons why:
Lenders won’t think you’re in bad shape financially
While your overdraft might be useful for cushioning your finances against big expenses, it can also give the impression to mortgage lenders that you’re struggling with money. Rather than using an overdraft to fund larger expenses, some people prefer to use a credit card; when used correctly (so repaid in full each month) credit cards allow you to build & improve your credit rating.
Improve your debt-to-income ratio
When determining whether someone is a low, medium, or high-risk candidate for a loan or mortgage, many lenders will examine your debt to income ratio. Put simply, this weighs your total monthly debt repayments against how much you bring in every month in income. If your debt is a significant portion of your income, lenders will most likely refuse you a mortgage. For this reason, it’s a good idea to try and clear other debts (including overdrafts) before applying for a mortgage.
Can you use your overdraft for a mortgage deposit?
The answer to this question will definitely depend on your personal circumstances. If you’re in good financial shape and almost have enough saved up for a mortgage deposit, your overdraft could potentially help you onto the property ladder.
In general, it’s a bad idea to use your overdraft to help fund your mortgage deposit. Lenders will be wary of candidates who indebt themselves to take out further loans, so it’s best to only use your overdraft to fund a small percentage of your deposit if absolutely necessary.
What do I do if my mortgage gets declined because of an overdraft?
So, you’ve had a mortgage rejection. If your mortgage application gets rejected, it’s not the end of the world. There are many reasons you might find yourself rejected by a mortgage lender, with some of the most common reasons including:
Poor credit history
If you have a poor credit history, some lenders will simply categorise you as a high-risk candidate and reject your application. There’s nothing you can do in this instance besides working on improving your credit rating and working on reducing your personal debts.
High levels of debt
If you (or someone in your household) already has lots of debt to their name, many lenders will be unwilling to grant you a mortgage approval. This is especially true the higher your debt-to-income ratio is. Put simply, candidates with high levels of debt are considered ‘high risk’ candidates; most banks want proof that you’ll be able to pay off your mortgage with ease, and a history of mounting debts isn’t particularly reassuring.
Too many credit applications
When going through your credit report, most lenders will take a look at how many applications you’ve made for credit: in this instance, ‘credit’ includes overdrafts, requesting an increase to the limit on your overdraft, applying for credit cards, and applying for loans. If a lender sees that you’ve applied for lots of credit, they might get the impression that you struggle to make ends meet already, and that a mortgage will only exacerbate your financial problems.
What to do if your mortgage application is rejected
If your mortgage application is rejected, there are a number of steps you can take. Firstly, generally speaking you can’t appeal the decision; you’ll simply need to work on improving your credit score and improving your finances before re-applying. You can also speak with a mortgage broker who will be able to give you expert financial guidance and help.
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How to Improve Your Credit Score
If you want to increase the likelihood of your mortgage application being accepted, building a strong credit score is key. Here are just a few ways you can improve your credit rating and secure a mortgage in the future:
Get a credit card
It might seem counterproductive to get a credit card if you’re struggling with money, but it’s actually one of the fastest ways you can build your credit rating – so long as you use the credit card exclusively as a means of building credit.
The key is to ensure that you pay off your balance in full every month, and never spend more than you can afford to pay off at one time. This will reflect positively in your credit rating, and your credit score will go up.
Track your finances
With increased living costs, car bills, phone bills, rent and more it can be hard to keep up with your money. However, tracking your finances is a great way to keep on top of your bills and prevent yourself from running out of cash and relying on your overdraft or credit card at the end of the month.
To keep on top of things, go through your months’ bank statements at the end of every month, double-check all your financial transactions, and find ways to cut corners where possible.
Always pay your bills on time
Whether it’s your credit card bill or your utility bills, the key to building a strong credit report is always paying your bills on time. Late payments will count negatively against your credit rating, while punctual payments every month will boost your credit score.
Don’t borrow more than you can re-pay
If you don’t want to find yourself in financial difficulty, never take out loans that you know you’ll struggle to pay back. Whether it’s a credit card or an authorised overdraft, only take out a sum that you can easily repay in full. If you take out a credit card, never spend more than you can repay at the end of the month.
Ideally, try not to exceed 30% of your credit limit at any given time. Being close to your credit limit counts negatively against your credit rating, and can contribute to a bad credit score.
So, does an overdraft affect a mortgage application? Potentially. If you have a strong history of overdraft reliance, a mortgage lender might consider you a ‘high-risk candidate, and be less willing to approve your mortgage.
To increase the chances of your mortgage application being approved, it’s a good idea to clear your overdraft and clear any other outstanding debts in your name.
If you need further advice or if your mortgage application has been rejected – you can seek guidance advice from a member of our team, who will be happy to provide mortgage advice as well as helpful financial advice.