Can Loan Debt Stop You Getting a Mortgage Certificate?

With mortgages often exceeding ￡100,000, lenders have to be sure that recipients are trustworthy and will have the means to repay to money during the agreed period. This means that they will often carry out forensic checks on your current financial status, credit history and your employment security. One thing that can really stand in your way is outstanding loans and other debt.

The reason why existing debt is such an important factor for mortgage companies and lenders in general is pretty straightforward. Effectively each person has a level of borrowing that they can safely manage. The bigger your total debt, the riskier you are perceived. This is due to the simple fact that debts need to be repaid, which takes time and the longer you have a loan, the greater the potential for defaulting.

Banks, building societies and other lenders are fully aware that your financial stability is constantly changing. A drop in earnings or the loss of a job can occur almost without warning. If and when it does, your ability to repay outstanding debts will be significantly impaired. This is why your current risk rating is so important in all lending decisions.

To use a real-life example, let's pretend you borrowed ￡10,000 to pay for wedding expenses and have an existing agreement for a new car for ￡6,000. Once you add in any outstanding credit, including overdrafts, store and credit cards, let's say for the sake of this example you have ￡4,000, this can really mount up. In fact you would have ￡20,000 already outstanding, which would clearly impact the mortgage provider's decision.

Assuming that you have a strong credit rating, are happily employed and receiving a good wage, any outstanding debt shouldn't be a major issue though. Whilst you might not be able to borrow as much as you might have perhaps hoped to achieve, it shouldn't mean that gaining a mortgage certificate is impossible.

The more obvious issue, particularly for first-time buyers with no existing equity, is that you would then have to find enough to cover the deposit. Due to the tighter banking regulations that are now in place, most lenders will require a deposit of between 10 and 25% of the total cost of the property.

Between July and September 2011 the average price of a home in the UK was ￡241,461. As such, if you had to provide a 20% deposit on a property at this price, you'd have to have over ￡48,000 ready to hand over. Perhaps the most obvious solution would be to borrow the money from a bank. However, this would of course undermine the whole point of having a deposit in the first place as you would still effectively have a 100% mortgage - albeit possibly through more than one lender. It is for this reason that if you are seeking a mortgage, the provider will have to consider all arrears; otherwise you could potentially keep borrowing just to build more debt - which would be dangerous and counter-intuitive.

So loan debt will certainly be taken into account whenever you come to apply for a mortgage, or indeed any other form of credit. The more debt that you have, the greater the difficulty you're likely to encounter in attempting to borrow more. It will impact your credit rating and it could even mean that you have to delay any decisions on whether you apply; after all, failed applications can count against you for many months, meaning that any undue haste could lead to a substantial delay in securing a mortgage agreement with your bank.

Vincent Norman is a finance writer who writes for a number of finance businesses. For payday loans, he recommends Paydaypower.co.uk

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