Ideally, you want your finances to be in the best possible shape when you apply for a mortgage.
So, if your bank account has an overdraft that you sometimes dip into, or are using right now, you might feel a little apprehensive about making a mortgage application.
The good news is that using your overdraft every now and then should generally not stop you from being able to get a mortgage. However, it does depend on a few factors, and if your overdraft history doesn’t reflect positively on you, it might end up damaging your mortgage chances.
Read on to find out how using your overdraft could affect your mortgage application.
Speaking to an experienced mortgage advisor can help you to understand your options and get a great deal on your mortgage. If you’re looking for expert mortgage advice, you can speak to an independent mortgage broker with Unbiased. Every advisor you find through Unbiased will be FCA-regulated, qualified and unconnected to product providers – so they can offer you truly unbiased advice.
What is an overdraft?
An overdraft allows your bank balance to dip below £0 in your current account by borrowing from your bank.
An “arranged” overdraft is one that you’ve agreed in advance with your bank, and is typically between £250 to a few thousand pounds. If you have an arranged overdraft, you were likely made aware of this when you first opened the account.
A certain portion – such as the first £50 or £100 or sometimes more – of an arranged overdraft is often interest-free, meaning as long as you remain within this buffer zone, you won’t be charged if you don’t repay straight away. However, even if you do exceed this buffer and get charged interest, as long as you pay it off in good time, this will be treated like paying off a loan and shouldn’t damage your credit score. In fact, if you can demonstrate you can manage your borrowing responsibly and get back into the black quickly, this could even help your credit score.
If you dip below £0 on your account with no arranged overdraft in place, or you exceed your arranged overdraft limit, you enter an “unarranged overdraft”. You’ll be charged interest on this, though recent FCA rules state that your bank can’t charge you more interest for an unarranged overdraft than an arranged one. However, unarranged borrowing can have a negative impact on your credit score – and potentially damage your mortgage chances.
Find out more about how overdrafts work in our article How overdrafts work.
Will it affect my mortgage if I use my overdraft?
Generally speaking, having and sometimes using an arranged overdraft shouldn’t hamper your mortgage chances. As mentioned earlier, occasional use of an overdraft can actually boost your credit score, which in turn can bolster your application.
However, if you have used an unarranged overdraft, struggle to pay off your arranged overdraft in good time or use your overdraft frequently to the point of relying on it, this may hurt your credit score and cause you issues when you apply for a mortgage.
That’s because when lenders look over your financial details and credit history, they are assessing your ability to manage your outgoings reliably and make repayments on time. If they have reason to think that you are living beyond your means or can’t keep up with repaying an overdraft, it’s likely to give them second thoughts about giving you a loan for a mortgage, or at least about offering you the best deal.
If you think your recent overdraft usage could reflect poorly on you, it’s a good idea to make sure it’s paid off and wait until your finances are in good shape before you apply for a mortgage. You may wish to wait at least three months from your last overdraft usage, as lenders will typically request your last three months of bank statements when you make an application (although they may sometimes ask for more if they feel you are a high-risk case).
Of course, different lenders will have different attitudes towards overdrafts, and some may be more lenient than others.
Teddy Cenaj, mortgages expert at Rest Less Mortgages, says: “An overdraft doesn’t necessarily have any negative impacts on your mortgage chances. As long as it’s being managed properly and not going over the arranged limit, then it’s essentially treated like a credit card. If you’re still unsure, the best thing to do is speak to a mortgage advisor who will be able to look at your personal circumstances and advise you accordingly.”
Speaking to an experienced mortgage advisor can help you to understand your options and get a great deal on your mortgage. If you’re looking for expert mortgage advice, you can speak to an independent mortgage broker with Unbiased. Every advisor you find through Unbiased will be FCA-regulated, qualified and unconnected to product providers – so they can offer you truly unbiased advice.
What else should I do before making my mortgage application?
If you’re about to make a mortgage application and want to make sure you haven’t missed any steps in the process, our guide How to apply for a mortgage – everything you need to know takes you through all of the steps you need to follow both leading up to and making your application.
What can I do if my mortgage application gets declined?
Don’t despair if you’ve recently submitted a mortgage application and been rejected. The best thing you can do in this situation is wait before making any more applications, figure out why your application was declined, and take steps to rectify the situation. Read our article What to do if your mortgage application is declined for some useful tips.
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