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Mortgage after payday loans

Last updated on 6th September 2023 by Martin Alexander

Information on getting a mortgage after payday loans is often confusing and contradictory. As a result, we’ve created this guide to explain everything you need to know about mortgages and payday loans.

Can I get a mortgage after using payday loans?

Yes, a mortgage after using payday loans is possible, but it can be difficult. Furthermore, you won’t have the same flexibility as borrowers who have never used payday loans.

As with all mortgages, lenders each have criteria for assessing mortgage applications. Some lenders may decline your mortgage simply because of a recent payday loan. Other lenders may decline you for taking out a single payday loan five years ago!

Most lenders will assess the following on a mortgage after payday loans:

  • The frequency of your payday loan use
  • How recent was your last payday loan?
  • If you’ve had problems with your credit
  • The loan-to-value of your mortgage

How can I get a mortgage if I’ve used payday loans in the past?

If you’ve used payday loans in the past, it’s recommended to speak to a mortgage advisor who specialises in cases such as these. Specialist advisors can then guide you through the following:

  • Download your credit files – Your credit files will show you if there are any issues before applying for a mortgage. Furthermore, your advisor can guide you through how to repair and improve your credit score, which can boost your application. As you’ve used payday loans, this is an important step to improve your mortgage chances.
  • Arrange your paperwork – Presenting your application to a lender in the best light possible is crucial. This is especially true if you’ve used payday loans in the past. An advisor can support and guide you with this part of the process.
  • Find a suitable lender – Not every lender will consider applicants who have used payday loans. As a result, finding a lender without an advisor can be extremely difficult. Our experts can locate suitable lenders before you make an application to improve your chances of being accepted.
  • Submit an application – Once you’ve found a suitable lender, you can make an application. An advisor can assist you with the final step to avoid any late issues from arising.

Myth: Payday loans will help me get a mortgage

Although there is a lot of conflicting advice online (as there is with everything!), a payday loan certainly does not improve your mortgage chances. We’re astounded by the number of people we speak to who believe it’s possible to get a mortgage with payday loans.

Let’s clear the confusion up once and for all. Credit reference agencies such as Experian and Equifax assess your score partly on whether or not your credit is kept up to date. Falling behind with credit payments will knock your credit score.

Making payments on time will have a positive impact on your credit score. Taking out payday loans and repaying them on time shows credit agencies that you can keep up to date with your credit. This can improve your credit score as it shows you to be a good borrower.

So, what’s the problem with using payday loans?

Although mortgage lenders will check your credit score, using payday loans can result in your mortgage being declined. It’s important to remember that lenders will have their policies in place. Credit scores are only used as part of their assessments.

The main point is that you can have the highest credit score possible and still be declined a mortgage. If you’ve used payday loans, you simply can’t rely on a great credit score to secure a mortgage. Lenders will always prefer a borrower who doesn’t use payday loans instead of one who does.

Why don’t mortgage lenders like payday loans?

Most lenders tend to avoid applicants who have used payday loans. If you’ve had to rely on payday loans to make payments in the past, lenders may suggest that a mortgage may be too much for you to manage.

The main reason is that underwriters assume you’ve used payday loans due to financial hardships. For this reason, payday loans can ring alarm bells for most lenders as they show applicants to be high risk.

Don’t let this put you off. There’s still a selection of lenders that offer mortgages after payday loans and at pretty good rates too. The key is going to the right lender.

If ‘Lender A’ doesn’t accept mortgages after payday loans, whereas ‘Lender B’ does, you’d need to go to ‘Lender B’. This may sound obvious, but it’s only obvious if you know where to look and what criteria lenders have.

Lenders don’t openly have their assessment criteria available for everyone to see. Furthermore, they won’t discuss how payday loans will affect your mortgage. Only experienced advisors will have this information, as they’re in constant communication with lenders on a daily basis.

How much can I borrow if I’ve had a payday loan?

If you need a mortgage after using payday loans and are yet to speak to a mortgage advisor, it’s difficult to give you an exact amount of how much you can borrow.

That being said, certain factors will affect the amount you can borrow after using payday loans.

How lenders make assessments on affordability

As each lender will assess your affordability on different factors, the maximum amount you can borrow will differ.

Most lenders often cap mortgages after payday loans to around three to four times your annual income. Other lenders may use a completely different method to assess how much they’ll lend.

‘Lender A’ may offer you a maximum mortgage of £150k, with ‘Lender B’ prepared to offer you a maximum of £250k. ‘Lender C’ may not accept someone who’s used payday loans, and ‘Lender D’ declines applicants with a varied income.

This is why having an expert mortgage advisor can make all the difference. Advisors can present your income in the best possible manner to increase your chance of approval.

Will I need a large deposit?

If you have a 5-10% deposit and need a 90-95% mortgage, then the number of lenders available will be restricted. This becomes further apparent when you’ve used payday loans.

Most lenders require a 10% deposit and only offer 80-90% mortgages. That said, some lenders may offer mortgages with a 5% deposit, even after using payday loans.

Mortgage rates & fees for payday loans

If you’re applying for a mortgage after using payday loans, lenders will view you as a higher risk than normal. Because of this, lenders will tend to charge higher rates and fees to provide them with security, but this largely depends on the borrower.

For instance, if you have a large deposit, a great credit score and used payday loans six years ago, you may be offered great rates with minimal fees.

What type of mortgage can I get?

As lenders will be limited after using payday loans, you may also be limited in your mortgage type. For instance, if you had the choice of the open market, you could choose from different mortgage types such as fixed or tracker rates, interest-only or repayment. However, in this case, you may only be offered a mortgage product with limited options.

If a particular lender was to offer you a certain mortgage type, you may not have the option to pick and choose from all the varied types of mortgage products.

What if I have bad credit?

If you have bad credit in addition to using payday loans, then things can get really difficult. That being said, it’s possible to get a mortgage after using payday loans with the following credit problems:

In addition to payday loans, lenders will analyse every angle of your application as they deem you high risk.

The last thing a lender wants is for borrowers to use payday loans to meet mortgage payments. This is because your finances could easily spiral out of control.

What should I do if I’ve defaulted on a payday loan

If you’ve taken a payday loan and then defaulted, lenders will view you as an extremely high-risk borrower. This is because you’ve gone to the extent of using a payday loan and then defaulted, which from a lender’s perspective, shows that you’ve had financial difficulties.

As each case is different, you may have evidence that you’re now financially stable, which can improve your mortgage chances. You can also help your mortgage application by saving a large deposit or if the default was several years ago.

Which mortgage lenders accept payday loans?

Lenders aren’t all so rigid and can take your situation into account. You may have gone through a difficult time in your life, such as divorce or ill health. This could have directly impacted your financial stability.

With evidence of recovery, lenders can see you’ve taken financial control. Regaining financial stability can persuade certain lenders to see past the use of payday loans.

If you’ve been careless with your spending and incurred debts you could have avoided, lenders will need more to convince them to approve your mortgage.

Will my bank give me a mortgage after using payday loans?

Most borrowers usually go straight to a high street bank, only to be declined and then give up on getting a mortgage altogether.

The knowledge and experience of an expert can ensure that you’re informed of the best-suited lenders to go to. This means you’ll have a structured approach to getting your mortgage secured, which is what you’ll need to do if you’ve used payday loans.

The last thing you’ll want to do is take a chance with your mortgage application. This will only cause further setbacks if you’re declined (and a waste of time and money!).

Will it matter if I used payday loans over five years ago?

The timeline of when you last used payday loans makes all the difference. If your last payday loan was over six years ago, applying for a mortgage should be straightforward. This is especially true if everything else is intact, such as your credit file. If you’ve recently used payday loans, getting a mortgage can prove difficult but not impossible.

It’s important to note that some lenders may still decline you for having ever used payday loans. Even if you took a payday loan ten years ago, some lenders will see that as a red flag. That being said, there are enough lenders in the market that’ll tend to overlook the use of payday loans if they were over six years ago.

I’ve been declined because of a payday loan

If you’ve been declined a mortgage because of payday loans, don’t worry. We often speak to members of the public who have also been declined to go on and then get a mortgage.

Mortgage applications are sometimes declined at the last minute, which can be awful. Some lenders use automated programs to assess applications. Once underwriters detect certain issues, they’ll decline the mortgage as they haven’t been given any other information. Getting the decision reversed is often difficult, but it is possible.

This is why it’s always worth taking the time to speak with an expert. Our advisors can place your application with the best-suited lender. We’ll also keep close communication with the underwriters should anything give them doubts.

Many lenders will consider approving a mortgage after payday loans, and we work with them regularly. If you’re still unsure, ask our advisors a question to get started.

About the author

Martin Alexander
Senior Mortgage Advisor

Martin is a senior mortgage advisor who has held a CeMAP qualification for over 15 years while completing an MBA in Global Banking and Finance.