Having an overdraft facility is common for most bank accounts and simply having an overdraft will rarely affect your mortgage application. However, the way you use your overdraft can, such as whether you use it to help pay for your deposit.
No, using your overdraft to pay for your mortgage deposit is not recommended and puts you at risk of having your mortgage application denied. Mortgage lenders prefer mortgage deposits to come from savings and earnings to help demonstrate that you have good money management.
In this post, I’ll run through the risks of using your overdraft for a mortgage, whether you should pay off your overdraft before applying for a mortgage as well as other methods you can use to fund your deposit.
Risks of Using Overdraft For Mortgage Deposit
Knowing what risks there could be if you do choose to use your overdraft to help pay for your deposit can help you make a more informed decision. Below I’ve highlighted some of the risks involved.
- The mortgage lender denies the mortgage application. Some lenders may have strict policies in place that restrict any use of an overdraft as it is effectively taking out a loan to pay for your deposit.
- Negative impact on credit score. If you have already applied for a mortgage, the mortgage lender may have conducted a hard credit search on your credit report which can reduce your credit score. If they decline your application, you will need to go to a new mortgage lender that will submit a new hard credit search which will reduce your credit score again.
- Difficulty finding a new mortgage lender. Some mortgage lenders require you to disclose whether you’ve had any financial products declined in the past few years
- Delay in getting a mortgage application leads to losing property. There are a lot of moving parts involved in buying a new property, including finding the one you want to buy in the first place. If you are denied your mortgage application, or it runs into delays because of your deposit you run the risk of the seller changing their mind or selling the property to someone else.
- No impact and mortgage approved. Some mortgage lenders may not mind, or even ask whether you’re using an overdraft. This can happen if your overdraft only makes up a tiny fraction of your overall mortgage deposit, or you can comfortably afford the monthly mortgage repayments. This then raises the question if having an overdraft itself can affect getting a mortgage which I’ll run through below.
Does An Overdraft Affect Getting a Mortgage?
Yes, an overdraft can affect getting a mortgage as it is effectively a loan. One metric that mortgage lenders use when judging your eligibility is whether you can afford the monthly repayments.
If you have a large overdraft that is accruing interest each month, this can reduce your affordability and if you’re close to a threshold within your mortgage lender lending criteria, this could result in you having your mortgage application denied.
However, if you can demonstrate that you aren’t reliant on your overdraft and just use it for convenience then a mortgage lender may not judge it negatively. This could be for example if you get a free overdraft so are just using the money to have more money available or earning interest in another account.
How Can A Mortgage Lender Find Your Overdraft?
Mortgage lenders will request certain information to help them judge whether they want to approve your mortgage application. They can find your overdraft either by seeing it on your credit report when they perform a hard credit search or on your bank statement directly.
Mortgage lenders will check your credit report that will show a list of all the financial products you are using, including the historical monthly balance of any overdrafts.
When you apply for a mortgage you have to submit 3 to 6 months’ worth of bank statements of the bank account that receives your income. If this is the same bank as your overdraft, your mortgage lender will immediately be able to see that your balance is either consistently negative or regularly goes negative.
This means if you’re thinking about not telling them about your overdraft, they will most likely find it anyway.
Should You Pay Off Your Overdraft Before Applying For A Mortgage?
Ideally, yes you should pay off your overdraft before applying for a mortgage as it will help eliminate one source of debt. Mortgage lenders view sources of debt negatively as they’re a separate obligation that needs to be paid which will reduce your affordability of the mortgage payments.
If using your overdraft is costing you money in fees and interest, paying off your overdraft will also have the added benefit of saving you money. These savings can be put towards your deposit as well as improve your eligibility in the eyes of the lender.
However, if paying off your overdraft will mean you no longer qualify for the minimum deposit required to secure a mortgage, which is often 10% of the property value, then it may be worth looking at other options to fund your deposit.
Increasing Your Savings Rate to Help Save For A Deposit
I know this is a lot easier said than done, however increasing the amount you save every month by reducing your monthly expenses can help improve your chances to secure a mortgage.
One key metric that mortgage lenders use when reviewing your mortgage application is your spending habits. So not only will increasing your saving rate help you save for your deposit much faster, but it will also have the added benefit of improving your spending habits and affordability.
By improving your spending habits and affordability you may be able to qualify for a better mortgage product that has lower interest rates or even be able to get a mortgage with a lower deposit requirement, removing the necessity to use your overdraft altogether.
I’ve written a post explaining how mortgage lenders look at your spending habits that may be useful.
Using a Gift To Pay For Your Deposit
If you’re unable to come up with the full deposit money yourself, your friends and family may be in the fortunate position to be able to gift you the money to be able to put towards your deposit.
I’ve specifically used the word gift on purpose. If your friends and family do give you money to put towards your mortgage, they can’t expect you to repay the money as that would effectively be a loan. That would put you back in the same spot as trying to use your overdraft for the deposit.
Most mortgage lenders once made aware that some or all of your deposit money comes from a gift may require your friends and family to sign specific forms. This is mainly if the gift is over a certain size, such as £10,000 or the money isn’t from a relative. This form states that the money is a gift and is not expected to be repaid.
Summary – So Can You Use Your Overdraft?
Overall, no you shouldn’t use your overdraft to pay for your mortgage deposit as there are a variety of risks including your mortgage lender denying your mortgage application and delays leading to you losing the property you’ve set your heart on.
If you can comfortably afford the mortgage payments and can demonstrate that the deposit either only makes up a small fraction of the deposit, or is just being used because it’s a free overdraft facility then having an overdraft shouldn’t cause a major issue.
If you are worried about whether having an overdraft will affect your chances of getting a mortgage, definitely speak to a mortgage advisor. They can give you advice specific to your own circumstances and take you through all of your available options.
I’ve written a post that explains what questions to ask a mortgage broker that may be useful if you’re wanting to get their advice.
Hope everything goes well with securing your mortgage and that this post has given you some things to think about.
Hi, I’m John. I’ve always had a keen interest in Finance, so much so that I’ve made a career out of it! This site is a place where I can share everything I’ve learned as well as give me the excuse to research certain topics.
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