Does Overdrafts Affect Your Mortgage Application?

When you’re on the path to homeownership, every financial detail matters. 

From saving for a deposit to ensuring your credit score is in top shape, the journey is full of hurdles. 

But what about that overdraft you’ve been dipping into? Can it really affect your mortgage application?

Let’s break it down.

Can an Overdraft Impact My Mortgage Application?

Yes, it can. 

While having an overdraft doesn’t automatically disqualify you from getting a mortgage, how you use it can significantly impact your chances. 

Lenders look closely at your financial behaviour, and overdraft usage is one of the factors they consider.

If you’re using your overdraft every month, it might signal to lenders that you’re struggling to manage your finances. 

Regular reliance on overdrafts can raise red flags, leading lenders to question whether you can handle the additional responsibility of a mortgage. 

On the other hand, an overdraft that’s there but rarely used may not be an issue.

Does Overdraft Affect Mortgage Affordability?

When you apply for a mortgage, lenders will assess how much you can afford to borrow. This involves looking at your income, expenses, and any debts you have, including overdrafts. 

While overdrafts are a form of borrowing, they still count as debt and impact your debt-to-income (DTI) ratio.

If you often use your overdraft, it can make it harder to get a mortgage. Lenders might think you’re spending more than you can afford.

And this could make them less willing to offer you the loan amount you want. 

Most lenders prefer a DTI ratio of around 40%. This means your total debts, including overdrafts, shouldn’t be more than 40% of your income.

To get a clearer picture of your financial situation, you can use our Debt-to-Income Ratio Calculator. 

This tool will help you see how your overdraft might affect your mortgage application.

What Is Considered a Large Overdraft?

There’s no exact number to say when an overdraft is too big. But lenders might be worried if you have a lot of overdrafts or if they’re a big part of your income.

Let’s say you have three bank accounts with overdraft limits of £1,200 each. 

If you often use them and owe a total of £2,500, this could raise concerns. Even if you’re not maxing out each account, lenders might still see this as a problem.

A “large” overdraft isn’t just about the amount you owe. It’s also about how it compares to your income. 

If your overdraft is a big part of your monthly earnings, it could be a red flag. Regularly using your overdraft or always being in it might suggest you’re struggling to manage your money.

Lenders also notice if you’re close to your overdraft limit. If you’re often near or over it, they might think you’re having trouble with debt.

A large overdraft can also hurt your credit score, making it harder to get a mortgage.

In short, a large overdraft is one that makes you look financially stretched. This could make lenders less likely to approve your mortgage.

Can an Overdraft Affect My Credit Score?

Yes, overdrafts can affect your credit score. Overdrafts are recorded on your credit report as a form of debt. 

If you’re frequently in your overdraft or exceed your overdraft limit, it can have a negative impact on your credit score.

Using an authorised overdraft in a controlled manner may not harm your credit score, but unauthorised overdraft usage or exceeding your limit can cause significant damage. 

A lower credit score can make it harder to get a mortgage, or it may result in less favourable terms.

Should You Pay Your Overdraft Before Applying for a Mortgage?

Paying off your overdraft before applying for a mortgage can be beneficial, but it’s not always necessary. 

Lenders focus more on how well you manage your finances. 

If you choose to pay it off, aim to do so at least three months before your application to show a clean financial history. 

However, even without clearing it, managing your overdraft well and avoiding heavy reliance on it can still keep you in good standing with lenders.

What To Do If My Mortgage Is Rejected Due to an Overdraft?

First, don’t panic. 

Mortgage rejections happen, and understanding why you were declined is the first step to addressing the issue. 

If your mortgage was rejected due to overdraft usage, consider the following steps:

1. Review Your Finances – Look at your overdraft usage and overall financial situation. Are there areas where you can cut back to avoid dipping into your overdraft?
2. Repay Your Overdraft – As mentioned, if possible, clear your overdraft well before applying for a mortgage. Most lenders will ask for three to six months of bank statements, so it’s important to show a clean financial history.
3. Consult a Mortgage Broker – A good broker can help you find lenders who are more lenient with overdraft usage. They can also guide you through the application process to improve your chances of approval.

How to Improve Your Mortgage Chances with an Overdraft

If you’re using an overdraft every month, there are ways to improve your chances of getting a mortgage:

• Reduce Your Overdraft Reliance. Try to avoid using your overdraft for a few months before applying for a mortgage. This will show to lenders that you can manage your finances without relying on borrowed funds.
• Increase Your Income. Consider ways to boost your income, such as taking on extra work or asking for a raise. A higher income can offset the negative impact of overdraft usage by improving your affordability.
• Save More for a Deposit. A larger deposit can increase your chances of mortgage approval. It reduces the amount you need to borrow and can make you a more attractive borrower to lenders.
• Keep an Eye on Your Credit Score. Regularly check your credit report to ensure there are no errors and that your overdraft usage isn’t dragging down your score.

The Bottom Line

There you have it.

Now that you know how overdrafts can affect your mortgage, you might be wondering how to find a lender who will understand your situation. 🤔

Not all lenders are the same, and some might be more flexible with overdrafts.

A whole-of-market mortgage broker can make this easier. They can:

• Find lenders who are more lenient with overdraft usage
• Improve your financial profile before applying
• Make the mortgage application process quicker and easier

If you want to save time and stress, reach out to us. We can connect you with a good mortgage advisor who can help you with your mortgage. 🏡