Does Car Finance Affect Mortgage Applications?


As with all credit commitments, car finance can have an effect on a mortgage application.

Can I finance a car before getting a mortgage?

Yes, having finance for a car doesn’t mean you can’t apply for a mortgage, but you do need to be aware of the effect it can have on a mortgage application. 

If you have recently taken car finance, then this will have a larger impact on your credit score than if you have had the finance in place for a while. 

Does having things on finance affect mortgages?

Yes, having things on finance can affect mortgages. When a lender looks at your credit report, they will assess the amount of outstanding finance products that you have and this can impact your credit score with the lender. 

All lenders have their own way of credit scoring and place a different amount of importance to the number and size of outstanding credit accounts you have. 

The amount of your payments on outstanding finance will also affect the affordability calculations lenders use and can severely reduce the amount a mortgage lender will offer you. 

In general, lenders will take the annual total of your finance payments off your annual income before working out how much you can lend. For example, a £250/pm payment would reduce your income by £3,000 per year for affordability calculations.

Does car finance count as a loan?

Yes, whether the finance is a Hire Purchase, PCP or lease, car finance will still be counted as a loan for mortgage purposes.

How does car finance affect a mortgage application?

Car finance can affect your application in a number of ways. The first is that it will likely reduce the amount you can lend as the amount you pay for your car is deducted from your income for the lender’s affordability calculations.

Having just a car finance payment should not have a major effect on your credit score, as long as the payments are always made on time. 

However, if you have many credit agreements, this can start to reduce your credit score with some lenders and can cause issues with mortgage applications.

One important and often unknown issue with car finance is how it affects what is known as “debt to income ratio’’ (DTI). Many lenders will have limits for the total outstanding amount of debt an applicant has as a percentage of their annual income. 

In many cases, this isn’t a problem, but car finance can be an issue here. If you have a PCP agreement for your car – where you pay a smaller monthly payment and then have a “balloon payment” at the end – the total amount of finance is calculated as including this final payment as well. 

Many people use these types of agreements to buy a more expensive car with a lower monthly payment, but this can mean that your total debt to income ratio is above the lender’s limit and therefore would mean that your mortgage application is not accepted. 

Using an experienced mortgage broker, like ourselves at Barlow Irvin, will enable you to avoid these lenders and find one that either has a higher debt to income ratio, or doesn’t use one at all.

Does getting a car on finance affect your credit rating?

Having a car on finance can affect your credit rating in a few ways, and this often depends on how many other credit agreements you have showing on your credit report. 

Having a car on finance in itself won’t have much of an effect on your credit rating, as long as the payments are always made on time; however, if you have lots of other agreements for finance, adding a car finance as well can reduce your credit rating as you may be seen to be overcommitted and this will have a negative affect on your credit rating.

In some cases, having a car on finance can actually be a positive for your credit rating. If you have little or no credit history, this can be an issue for mortgage lenders and can sometimes cause a problem with a mortgage application. 

If you have a car finance agreement that shows a history of making your payments on time, this can improve your credit rating and provide evidence that you can be a good credit risk for lenders.

Does car finance affect affordability assessments?

Yes, your car finance will almost definitely affect a lender’s affordability assessment. When a mortgage lender looks at how much you can lend, they will take any credit commitment payments off your annual income. 

As an example, if you pay £250 pm for your car finance, the lender will reduce your annual income in their affordability assessment by £3,000, ie. 12 times £250 pm. 

In some cases, a large car payment can have a drastic effect on how much you can borrow for a mortgage.

Should you apply for car finance and a mortgage at the same time?

This is probably not a good idea. One thing that can really have a negative effect on your credit rating is having too many credit searches recorded on your credit report in a short space of time. 

If a mortgage lender sees that you have been applying for car finance at the same time as a mortgage, they may worry that you are taking on too much debt all at once. They will certainly need to include the new car payments in the affordability calculations.

If you need to buy a car at the same time as you are applying for a mortgage, speak to your mortgage advisor about how you should proceed. 

FAQs about Mortgages and Finance

How long after buying a new car can you apply for a mortgage?

Although there is no definite rule about how long you should wait, mortgage lender’s won’t like seeing a recent finance agreement added to your credit report when you are applying for a mortgage. 

It is probably advisable to avoid taking any new car finance out up to 3 months before applying for a mortgage, but always speak to a mortgage advisor as your individual circumstances should be considered before choosing which lender to apply to if you have recently taken out car finance.

Does car finance affect remortgaging?

Car finance will affect remortgaging in the same way as it will affect applying for a mortgage to purchase a new property. 

It can reduce the amount you can lend and may have an impact on your credit score, which may mean that a remortgage application is not acceptable to a lender.

Is it bad to get a car loan before a mortgage?

Getting a car loan immediately before applying for a mortgage can be a bad idea. 

If you are thinking of taking out a new mortgage, then it would normally be better to avoid also taking on other large financial commitments, such as car finance or other loans.

About the author 

Gary Oxborough

Gary is the Founder and Director of Barlow Irvin Financial Services Ltd. He has been in the Finance industry for over 20 years and has specialised in Mortgages since 2003. As well as running the firm, he is still actively involved in advising clients.

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