Does Car Finance Affect Mortgage Applications?

This is particularly the case if you have missed any of your repayments for your car finance, as this will negatively impact your credit score, and will therefore impact your mortgage application. On the other hand, making all of your repayments can actually improve your chances of mortgage approval. Read on as we take a closer look.

Will car finance affect your mortgage?

When you apply for a mortgage, the lender will scrutinise your finances. Whether you have an active car finance deal, or a previous one that has been fully repaid, will impact their decision for your mortgage application. This is because car finance is a form of debt. As such, your mortgage providers will look to see how conscientious you’ve been in repaying your car finance.

Remember, if you have defaulted on your car finance, or missed any payments, then this will impact your credit history. This will in turn affect your mortgage application, as you will appear less financially responsible and therefore of higher risk to your speculative provider. Thankfully, there are still ways of securing car finance even with poor credit.

On the other hand, a history of timely repayments and problem-free car finance can actually improve your credit score. Put simply, it shows that you are capable of making regular repayments as agreed and staying within your budget – as is required with a mortgage.

The importance of credit history and scores

Your credit history is the common link between car finance and your mortgage. Understanding it is key to how car finance affects your mortgage.

Every adult in the UK has a credit file. This is used to make credit checks whenever you apply for financial products. That could be a mortgage, car finance or just a personal loan. Lenders can perform a soft credit check, which doesn’t stay on your credit file. Or credit checks can be ‘hard’, which leaves a mark and can affect your credit score over time.

Checks on your file can include an in-depth credit report, which looks at several different aspects of your credit file. Or it could just be a credit score or credit rating. Credit scores are a rough indication of your standing as a borrower. A poor credit score indicates some issues on your credit report. On the other hand, a good credit rating shows that you’re relatively low-risk to lenders.

Does car finance affect your credit score?

Here’s how credit history links to a car finance agreement or mortgage application:

• Both car finance and mortgage lenders will want to check your credit score (and history) before approving your application.
• Car finance payments and mortgage payments both impact your credit score over time.

How car finance affects affordability assessments

It’s not just your credit score that impacts your mortgage and car finance. Affordability checks are another key area for mortgage lenders and other finance companies.

What is affordability?

While your credit history indicates your track record of debt repayments in the past, affordability looks at the present and future. In other words, can you afford to make certain mortgage payments or car finance repayments now and over the course of your repayment term?

One aspect of this is your debt-to-income ratio. This assesses how much of your income goes towards debt. In other words, it shows how much disposable income you have left to spend on the likes of mortgage repayments and car finance repayments.

Above all else, affordability checks look at your financial circumstances. Are you a responsible borrower who can comfortably afford the loan repayments you’re agreeing to? This is a key part of the mortgage approval process for a mortgage broker or mortgage lender.

Does car finance affect affordability?

The short answer is yes, if you have an active car finance deal in place, this will affect mortgage applications because of the affordability assessments that your prospective provider will perform.

Any mortgage provider will scrutinise your finances before offering a mortgage – this is actually a legal requirement, and involves looking at your credit score, employment status, debt, and history of loan repayment. If you’re currently repaying any loan such as car finance, this will be factored into your mortgage affordability assessment.

As a general rule, the higher the debt remaining for you to pay back on your car, the lower you’ll be lent for a mortgage – though this may vary depending on the provider. The theory is that the more you have to repay on other loans or assets, like your car, the less you’ll have to put towards your mortgage.

As such, if you do have a way of clearing the balance on your car finance before applying for your mortgage, this would be a sensible course of action, as your car finance won’t impact the application to such a degree.

Minimising how much car finance affects your mortgage

To summarise, here’s a short list of ways you can ensure that car finance doesn’t negatively affect your mortgage:

• Keep up with car finance payments to avoid late or missed payments that damage your credit rating. This will prevent you becoming a higher-risk borrower for mortgage lenders.
• Make sure you can comfortably afford monthly repayments before committing to a car finance agreement. In doing so, you’ll keep a bit of wiggle room when it comes to mortgage affordability, rather than reaching your financial limits.
• Pay off your car finance early if you need to improve your affordability to meet monthly mortgage payments. Getting rid of outstanding finance and existing debts means you have more disposable income going forward.

Car finance made easy

At My Car Credit, we pride ourselves on our customer service, and will work hard to find you a car finance deal that suits your needs and circumstances – so you can help rather than harm your credit score and any future mortgage applications. If you’re wondering how to make a car finance application work alongside a mortgage application, start by checking out our free Car Finance Calculator.