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Before approving a loan, mortgage lenders will run affordability calculations to work out whether you can afford to meet your payments.
As part of this assessment, lenders will look at your level of debt repayments, including credit cards, car loans, student loans or an advance from your employer.
This is known as the credit utilisation rate, calculated by dividing your current debt by your available credit limit.
Generally, it is recommended to keep your credit utilisation rate below 30 percent.
The level of acceptable debt to income ratio will vary from lender to lender, but generally the lower your debt to income ratio, the better.
EXAMPLE: Say your debts each month are: - £900 on your mortgage - £100 on your car loan - £200 payment on your credit card Your monthly debts will come to £1,200.
They may even make paying off your debt a condition of their mortgage offer.
However, many lenders are wary of doing this – there’s a difference between saying you’re going to pay off your debts and actually doing it!
Payday loans, on the other hand, are considered a major red flag by most lenders.
If your gross income is £3,600 per month, your debt to income ratio is 33% (£1,200 ÷ £3,600 x 100 = 33%).
Aside from looking at how much you owe, lenders will look at the ‘spread’ of your credit, meaning the number and types of credit cards or loans you hold.
Does the amount of credit I use matter to mortgage lenders? When life throws out surprises, running up a credit card debt is often unavoidable.
What if I plan to pay off my debts soon after getting a mortgage? You might worry that carrying debt will put you in a weaker position for a mortgage – would a bank really want to lend money to someone who has had to borrow elsewhere?