How Does an Overdraft Affect Getting a Mortgage?

If you’re getting a mortgage, there are so many areas you need to consider that it can often feel like an uphill struggle.

You might be preoccupied with ensuring you pass affordability, or your deposit is sufficient for the mortgage and overlook seemingly small commitments like your overdraft.

Unfortunately, overdraft usage is one of the most common issues that crop up during a mortgage application, and worse still, it can cause your mortgage to decline altogether.

So, do you need to know about overdrafts and how to ensure that you will not encounter problems?

This guide explains everything you need to know about overdraft usage and applying for a mortgage let’s get stuck in!

Can You Apply for a Mortgage with an Overdraft?

Yes, you can apply for a mortgage whilst having an overdraft and some lenders aren’t concerned about overdraft usage.

However, many lenders are especially strict around overdraft usage and there are areas you should be aware of if applying to those lenders.

There are a few problems that can occur if you are applying for a mortgage with an overdraft:

• Depending on the size of the overdraft, your affordability calculation can be impacted.
• If you have exceeded the overdraft limit.
• Regular usage of an overdraft (this is probably the most common issue to crop up).
• Recent increase or application to increase your overdraft.

All these scenarios have a different effect on your mortgage application and all of them have nuances that can sometimes make them a non-issue and other times cause a decline.

Below we explore each of these problems in more detail, so you have the information you need to get your mortgage.

Does an Overdraft Affect My Affordability?

In most cases, simply having an overdraft or using an overdraft doesn’t drastically impact your affordability.

This is because overdrafts tend to be what’s considered as ‘low-level borrowing’ and the amounts on a typical overdraft are sufficient to damage your affordability significantly. 

In most circumstances you will notice a minimal drop in your affordability when your overdraft is factored in or in rarer cases, you might not notice any drop in affordability at all.

However, there are overdraft values that can impact your affordability and sometimes in quite a significant way.

Typically, an overdraft that impacts your affordability will be a medium to high-value overdraft such as having £1000 overdrafts across all your accounts.

Likewise, the more overdrafts you have across your accounts, the higher the likelihood your affordability will be impacted. 

For example, if you have four accounts with different banks and all have a £1500 overdraft available on them, the lender must assess this as £6000 of potential borrowing available to you.

It becomes even more tricky when you use those overdrafts an unused overdraft is not likely to cause problems with your affordability, even if you have access to those funds, in a similar way to having an unused credit card.

But in cases where the overdraft is being used, you will likely find this negatively impacts your affordability.

Notice throughout this section that there is no definitive answer because every lender has different rules around overdrafts and assessing affordability.

You should be aware that both having an overdraft facility and using an overdraft can cause your affordability calculation to drop.

Overdraft Scenarios that Affect a Mortgage

Aside from affordability, some very pesky overdraft issues can crop up during a mortgage application and these can cause your application to be declined outright, so they are important to be aware of.

Over the Agreed Overdraft Limit

If you exceed your overdraft limit this will cause problems with almost all lenders.

The reason for this is the lender will see you as living beyond your means.

Relying on an overdraft is one thing but exceeding the limit of an overdraft suggests you’re unable to manage your outgoings responsibly.

Lenders will also be aware that exceeding an overdraft limit incurs additional fees and costs further exacerbating the issue.

If you go beyond your overdraft limit it is best to repay the amount outstanding including your approved overdraft allowance and any fees. 

If you’re applying for a mortgage, it is best to wait three months after this has been repaid and ensure you’re not using your overdraft and your account balances are healthy.

If you do apply in a circumstance where you have exceeded your overdraft limit it is common for lenders to decline the application altogether, which can impact your credit score and further complicate future mortgage applications.

Regularly Using an Overdraft

This problem occurs the most commonly in our experience as overdraft usage has been normalised by banks and people aren’t aware it can cause significant problems with a mortgage application.

Once again, regular overdraft usage signals to a lender that you’re living beyond your means.

If you have to borrow money month on month to make ends meet, it will flag as a risk you can’t manage your expenditure and might not be able to repay the mortgage.

With the potential consequences of failing to pay a mortgage being so significant (repossession), a lender is extremely careful to only lend where there are no concerns about your ability to repay.

Regularly using your overdraft will cause most lenders to further scrutinise your application and, in many cases, will cause an outright decline of your application.

To avoid this being an issue, you should:

• Look at your income and expenditure and manage them in a way that you no longer need to use your overdraft. Work out areas you can save money or subscriptions you can cancel the idea being to reduce your outgoings to avoid using your overdraft.
• Repay the overdraft and maintain your bank accounts at a healthy level for the months building up to your mortgage application. Lenders aren’t too concerned about the actual amount of money you have in your account providing there are funds to cover outgoings they will be happy.
• Don’t be tempted to use your overdraft after the mortgage application has been submitted sometimes lenders ask for additional bank statements during underwriting and you can be caught out mid-way through an application with overdraft usage.

Recently Increasing Your Overdraft

Increasing your overdraft will first and foremost have an effect on your credit score. In most cases, this change in score is so minimal that it won’t affect a mortgage application.

However, if your credit score is already borderline for the lender you’re applying to, increasing your overdraft can cause your application to decline.

Aside from the credit score issue, the lender will also be concerned in general about you extending an overdraft within months of making a mortgage application.

They will not want you to use overdraft funds towards a deposit and they will scrutinise your expenditure carefully to understand if you’re living beyond your means.

As with the abovementioned issues, if a lender feels that you will be unable to cover monthly bills and repay the mortgage, they will decline the application. 

The best advice here is do not apply for an increased overdraft limit before applying for a mortgage.

How Does an Overdraft Affect my Credit Score?

Credit scores are difficult to understand in any comprehensive way even for a mortgage broker.

This is because credit reference agencies use different algorithms to calculate your score and some actions can counterintuitively improve your score while other actions have a negative impact.

For example, if you repay a loan early you would expect to find your credit score improve. In some cases, this does happen, and your credit score improves.

However, in some cases repaying a loan early can damage your credit score.

The same ambiguity exists around overdrafts and the way your overdraft usage will impact your credit score will be entirely dependent on your overall credit history.

For example, if you have actively managed your finances well in the past, opening or using an overdraft could improve your score or it may stay the same.

If you have a history that isn’t as perfect, extending borrowing or using your overdraft can drop your score sometimes quite heavily.

How your credit score is affected by overdrafts will be dependent on how the credit reference agencies assess you as an individual.

There isn’t a set in stone outcome for using overdrafts when it comes to credit scores.

With that said, it is fair to say that in most cases an overdraft will change your credit score in some way and in the build up to a mortgage application it can be frustrating if your score drops unexpectedly.

The best practice is to avoid using an overdraft before applying for a mortgage and at least that way you will have a better gauge of your credit score with the view to keeping it consistent.

Should I Clear My Overdraft Before Applying?

This depends on your personal financial situation and while most brokers will advise you to repay your overdraft, this isn’t necessarily going to help your mortgage application.

The general rule is to repay your overdraft at least three months before applying for a mortgage and after it’s repaid don’t use it again.

Here is where things become a little more complicated though.

We mentioned three months because most lenders will ask for three months’ worth of bank statements for a mortgage application.

This isn’t guaranteed and some lenders will ask for more than three months’ statements.

It is common for lenders to request six months or even up to twelve months of bank statements on ‘high-risk’ cases.

In these riskier cases to the lender, repaying the overdraft three months before will be of no benefit because a lender will be able to see the overdraft usage before that point.

It may even become a red flag in these cases because an underwriter might see the overdraft repayment as a ploy to get the mortgage and expect usage to return after the application goes through.

Credit Score and Application

If you are repaying debt including overdrafts, it is best to do it well in advance of your mortgage application (at least three months from the application).

This is because you will want to give your credit score time to update before your application and lenders can sometimes be slow to update your credit record.

This additional time between paying off your overdraft (or other debt) and your application allows you to get a sense of where your credit score is and fix any unexpected issues.

If you’re concerned about overdraft usage or wondering whether you should repay it, it is best to speak to a mortgage broker.

A mortgage broker will go through your overall financial situation with a view to getting you a mortgage they will also be able to find the best lender for you and advise you about their overdraft criteria.

It is best to approach a whole of market broker in these circumstances as there may well be lenders available to a whole of market broker that you will not be able to access with other brokers.

Boon Brokers is a whole of market mortgage, insurance, and equity release broker.

We offers fee FREE advice and we have extensive expertise with overdraft usage and mortgage applications contact Boon Brokers today if you are worried about your overdraft.

What to do if You Have Been Declined Due to Overdraft Usage

If you have been declined for your mortgage due to overdraft usage don’t despair.

Discuss the situation with Boon Brokers and we can advise you on the best course of action going forward to get the mortgage you want.

Every case where there has been a decline will be different and some are easily fixed while others need a little more work you will understand the best steps specific to your situation by contacting a whole of market mortgage broker.

Contact Boon Brokers today for fee FREE mortgage advice.