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How does an overdraft affect a mortgage?

Last updated on 2nd September 2023 by Martin Alexander

We’re often asked whether an overdraft will impact the chances of getting a mortgage. In short, simply having an overdraft will rarely affect your mortgage, but how you use it certainly can.

Overdraft facilities are available on most bank accounts, and many rarely use them. However, an overdraft can be a cost-effective way to manage financial affairs, especially when you’re on a budget. Nonetheless, constantly using your overdraft can make getting a mortgage difficult.

This guide explains everything you need to know about overdrafts and mortgages. If you’re unsure whether you should apply due to having used your overdraft recently, you can speak to a specialist.

Can I apply for a mortgage with an overdraft?

Applying for a mortgage with an overdraft can be very simple if you’ve never or rarely used the facility. Problems typically arise when you’ve used your overdraft recently or tend to use it often.

When mortgage lenders assess your application, they’ll determine how dependent you are on your overdraft. If you constantly use overdraft facilities and have a number of open overdrafts with several banks, lenders may decline you.

Although there are various aspects to a mortgage application, such as credit checks and income assessments, lenders will also check your affordability level. This is so lenders can assess your financial ability to repay the mortgage you’ve applied for.

Does an overdraft affect getting a mortgage?

Using an overdraft can incur monthly charges such as interest fees which can affect your affordability. As a result, you may fall short of the amount you’ve applied for.

If you’re financially stable, your overdraft will perhaps be rarely used. That being said, if you constantly use your overdraft facility, it can suggest that your finances are under pressure. This is often why lenders are cautious about approving mortgages to applicants who constantly use their overdrafts. That being said, some lenders may still consider you, even if you dip into your overdraft often.

Even if you have a sizeable agreed overdraft amount, getting a mortgage is still possible. Nonetheless, lenders will take into account your overdraft limit. This is because your ability to borrow a large amount through your overdraft may pose a financial risk if you can’t repay it in time. This can then have a knock-on effect on your mortgage payments.

Should I clear my overdraft before I apply for a mortgage?

Although you may not need to do this, clearing an overdraft before applying for a mortgage can be useful. Being in the middle of an overdraft can sometimes raise concerns depending on the amount and fees involved. Having no overdraft or clearing your overdraft can help you to avoid these situations.

Lenders will usually assess your overdraft in two ways. For instance, underwriters will look at your overdraft limit and the frequency at which you use it. Both can cause certain implications during your assessment.

Having an unused overdraft

It can still be concerning for lenders if you have a substantial overdraft limit but rarely or never use it. This is because you can take on a large sum, which will likely entail large fees if the overdraft isn’t paid on time.

Taking on an additional debt with your mortgage may create financial pressures that could affect your ability to repay your mortgage. Nonetheless, this is quite rare and is assessed with your income and the mortgage amount you wish to borrow.

Using your overdraft facility frequently

The frequency with which you use your overdraft will likely affect your mortgage application. This is especially true if you appear dependent on your overdraft to support your living costs.

It may suggest your finances are stretched, which can be concerning for lenders, especially if you’re about to take on a mortgage. Constantly using your overdraft each month can suggest that the additional expense of a mortgage may be too much.

That being said, it does depend on your lender and how they assess the rest of your application, including your income. For instance, you may have recently got a pay rise or a new job. Furthermore, you might have had a recent large expenditure or a change affecting your finances. Such expenses can explain why you’ve been using your overdraft more than usual.

You can still get a mortgage while in an overdraft, but not every lender will be accessible.

If you’ve been declined a mortgage because of your overdraft

It’s not uncommon to be declined a mortgage because of an overdraft. Some lenders are more suitable than others if you wish to apply for a mortgage with an overdraft.

If you’ve been declined for a mortgage, your lender should give you the reasons why. You may be surprised that it has nothing to do with your overdraft and could be another reason, such as an unknown credit issue or discrepancy with your application.

Mortgages can be declined for several reasons, and sometimes lenders aren’t clear on why they’ve declined you. If your lender has told you that they’ve declined you specifically because of your overdraft, there are still questions you can ask. For instance, what was it regarding your overdraft that the lender didn’t like?

Was it the frequency at which you used the facility, or did you have a large overdraft? This will give you more information about how your overdraft has affected your mortgage and why your lender declined you.

Being declined a mortgage can leave you feeling disappointed and frustrated, but this doesn’t need to be the end of your mortgage journey. We’ve helped many applicants get a mortgage after they’ve been declined elsewhere. Applying for a mortgage without preparing your application will likely entail problems further into your mortgage.

Our experts are on hand to answer your questions and can help with your mortgage application if you have an overdraft.

Overdraft mortgage FAQs

Yes, getting a mortgage while you have an overdraft is possible. That being said, lenders will check your reliance on your overdraft facility. Constantly using your overdraft can make it difficult to get a mortgage.

Yes, if you’re actively in an overdraft, it can have a negative effect on your mortgage. This is because it can give lenders the impression that you’re struggling financially. This is why clearing your overdraft before applying for a mortgage can help.

No, using your overdraft won’t stop you from getting a mortgage, but it can make it more difficult. This is why it’s recommended not to use your overdraft if you’re considering applying for a mortgage.

No, using your overdraft to pay a mortgage deposit isn’t recommended. Getting a mortgage will incur a new financial commitment.

If you’re having to use your overdraft to pay a mortgage deposit, you should reconsider whether you’re ready to take on a mortgage. Lenders prefer mortgage deposits to come from savings and earnings.

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.