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Getting a Mortgage After Payday Loans

Is it possible to get a mortgage after having a history of payday loans – and what will short-term credit on your record mean for your mortgage lender assessment?

Payday Loans And Mortgages: How Are They Connected?

Payday loans are a common tool to help pay urgent debts or expenses while waiting for the month-end to arrive.

Reasons range from covering an emergency, such as a car breakdown, to bringing forward cash from your paycheque to cover ongoing costs.

However, payday loans usually carry very high rates of interest and can be detrimental to your credit report.

Mortgage lenders can, in some instances, turn down an application if you have ever used a payday loan - however, business finance broker negotiate many mortgages for clients in this situation.

For tailored advice about securing a mortgage in your circumstances, get in touch at [email protected] or give us a call on 0330 304 3040.

Is It Possible to Get a Mortgage If I've Had a Payday Loan?

It is, yes - although some mainstream lenders do not offer mortgages to applicants who have had a payday loan, many of our specialist lenders are happy to extend an offer.

Some high street mortgage providers will even reject applicants who have had a payday loan at the start of their six-year credit history.

Therefore it is essential to apply to the right lenders to avoid having an application rejected and potentially more marks showing on your credit report.

Factors lenders will consider:

  • How recently the payday loan was taken out.
  • Whether it is a regular occurrence or a one-off.
  • What loan-to-value (LTV) borrowing you are applying for.
  • Whether your credit file shows any other credit issues.
About Your Mortgage
Single or joint mortgage?
What’s your yearly income?

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Based On Your Yearly Income, You May Be Able To Borrow

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Most lenders will let you borrow 4.5 times your annual salary so, as long as you have a standard 10% deposit, you should be able to borrow this much.

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Depending on your personal circumstances, some lenders may let you borrow 5 times your salary.

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Lenders usually cap the amount they lend at 5.5 times your salary, so it’s unlikely you’ll be able to borrow more than this.

Will a Mortgage Lender Check to See If I Have Had a Payday Loan?

They will - a payday loan will show on your credit file, which will always be checked when applying for a new mortgage. This might also be verified through bank statements.

It is always vital to provide full information when applying for a mortgage - if you fail to declare this on your application and it comes to light during the credit check process, your application is very likely to be rejected.

Can I Remove a Payday Loan from my Credit File?

Credit reports show all borrowing and financial circumstances from the last six years. If you had one payday loan six years ago, many lenders would disregard this from their decision.

It is not possible to remove a payday loan from your credit file until the reporting period has elapsed, and some lenders will outright refuse an application if any payday loan shows, no matter how long ago this was.

In other cases, if you can provide contextual information about why the payday loan was required, this will be accepted even if it was in the same month as your mortgage application.

Why Is a Payday Loan a Negative on a Mortgage Application?

All payday lenders will show the loan in the same way on your credit file - usually, this shows as:

  • Advance against income, or
  • Short-term credit, or
  • Revolving credit.

The report will also show the name of the lender, and the payment terms agreed.

This includes all payday lenders, and although some may use slightly different terminology or offer different repayment terms, all reflect a need for short-term, high-interest credit which causes a lender concern.

How Long Should I Wait After a Payday Loan to Apply for a Mortgage?

The relevance of your payday loan depends on the other circumstances around your mortgage application. If the LTV ratio is low - i.e. you are applying for a small amount of borrowing in relation to the value of your property - the risk is much lower.

That means that the higher your deposit and the more equity you own in your home, the more likely your application is to be approved.

As an indication, here is the volume of lenders typically accepting mortgage applications from people who have had payday loans:

LTV Ratio

Number of mortgage lenders accepting applications last year

Number of mortgage lenders accepting applications this year

95%+

3

3

85-95%

7

5

75-85%

11

7

Under 75%

Multiple

11

This changes regularly, and so Revolution Brokers always recommend making a fresh enquiry to analyse who the best lenders are to apply to in the current mortgage climate.

How Do Payday Loans Impact Your Credit Score?

Generally speaking, payday loans don't damage your credit score.

In actuality, you can improve your credit score through payday loans if you make your repayments on time.

Many lenders simply disapprove of payday loans and consider applicants who have taken out emergency finance against their wages higher risk, regardless of how quickly you repaid the debt.

Some mortgage providers don't use a credit score as part of their decision-making process and may decide against their internal policy whether having a payday loan on your credit file means they are unable to offer to lend.

Simply put, each mortgage provider decides what their lending policies are, and has an in-house scoring model that they use to assess each application.

Where lenders have a clause that states they will not lend to applicants who have used payday loans, this will be rejected no matter how well you perform on the scoring system.

Revolution Brokers work with clients who have an outstanding credit score and yet have been declined a mortgage because they have used a payday loan in the past.

Why Do Mortgage Providers Dislike Payday Loans?

Every time a mortgage lender considers an application, it will be passed to their underwriters, who analyse the risk attached. Payday loans are, by some lenders, considered a high-risk factor, and indicate mismanagement of funds.

However, there are plenty of specialist lenders who continue to offer competitive mortgage rates to applicants who have payday loans on their credit file.

The reasons it can be so tricky to find a mortgage lender when you have a payday loan history are:

  • Lending Policies: Each lender has its own criteria, and many do not publish these. It can therefore be impossible to know what their attitude is to payday loans until after applying.
  • Restricted Lending: Lenders can only offer their own products, along with whatever restrictions they carry. As an independent broker, we have access to the whole of the market, and can therefore offer specialist finance from any lender.
  • Case-by-Case Approvals: In some cases, there is no particular policy in place. In this scenario, some applications might be approved, and others rejected, and some lenders will suggest applying and leave it to the underwriters to make the decision.

What Difference Will a Payday Loan Make to My Mortgage Application?

There can be several restrictions in place if you've used payday loans:

  • Many lenders will limit the LTV ratio they are willing to lend up to. Applicants with a payday loan history may need to pay a higher deposit, from 15% and above. Revolution Brokers work with niche providers who will accept as low as a 5% deposit in some scenarios.
  • The number of mortgage products available is lower if you have had payday loans, and therefore a lender will offer a limited choice of terms and types of lending. Using a broker is an ideal solution since you can pick and choose between mortgage types, structures and repayment terms.
  • Interest rates and fees charged for setting up a mortgage can be higher. However, if your payday loans were some time ago, you have a good credit score and have a reasonable deposit, there is no reason you can't find a competitive mortgage through a broker.
  • Some lenders will have stricter affordability criteria for applicants with payday loan history. This all depends on their policies and how much you wish to borrow. Some will limit lending to 3 x your annual income, whereas others will lend up to 4.5x. Our lenders will typically look at your monthly disposable income as the primary factor.

With so many variables, you might find that two lenders offer very different mortgages and rates. It is therefore essential to work with an experienced broker who will know which lenders are best placed to support your requirements.

Other factors come into play, including what type of employment you have, and how regular and reliable your income is.

What Can I Do If My Mortgage Application is Rejected Due to a Payday Loan?

The best solution is to work with a broker who will find the right lender to apply to, and ensure that they are comfortable with your payday loan history before applying.

We know which lenders will decline payday loan applicants, and will ensure you avoid submitting any applications which are likely to be rejected.

Many Revolution Brokers clients have been refused a mortgage and gone on to apply to multiple other lenders - which can be hugely damaging to your credit file.

Likewise, clients can have an agreement in principle and then be rejected at the last minute when the mortgage is going through the final underwriting process.

This happens when mortgage lenders use a scoring system that doesn't identify a payday loan history from the beginning - and thus generates an offer which is later withdrawn.

How Can I Get a Mortgage If I Have Bad Credit & Have Used Payday Loans?

The more complex your credit issues, the trickier it is to secure competitive mortgage lending.

Having both an adverse credit history and a record of payday loans creates two risk factors for a lender to have to assess.

However, suppose you have used payday loans and repaid them in good time, and have since managed your finances well. In that case, we can apply for mortgage products with lenders who offer excellent terms and more flexibility when it comes to assessing your application.

If you have any credit issues such as those below, you generally need a higher deposit, although some specialist lenders will accept as low a deposit as 5%:

  • Late payments
  • CCJs
  • Defaults
  • Debt management plans
  • Bankruptcy
  • IVAs
  • Repossession

Having a payday loan on your credit file as well as any of the above means that it is essential to work with a specialist broker who can identify a lender that meets your needs.

Can I Get a Mortgage If I Have Defaulted on a Payday Loan?

In this scenario, the number of lenders who will accept your application reduces even further - while payday loans are harmful, not being able to pay back short-term emergency financing indicates more severe credit issues.

However, Revolution Brokers can work with you to demonstrate that your finances are now back in a good position and that you have recovered from the credit pressures associated with the default.

The longer ago the payday loan default, the more likely it is that you will be offered the lending you need.

Expert Support with Mortgages After Payday Loans

Revolution Brokers are an independent, whole-of-market broker who negotiates advantageous mortgages on behalf of thousands of clients who have used payday loans and experienced credit issues in the past.

Give us a call today on 0330 304 3040 or drop us a message at [email protected] and the team will be delighted to start the application process for you.

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