Does a payday loan affect your chances of getting a mortgage?

No, a payday loan on file will not impact your ability to get a mortgage. It is a common concern that is raised amongst borrowers who fear that a payday loan on their credit record could be looked upon negatively when they want to apply for a mortgage at a later date. But it is not the case.

Why are there concerns that payday loans could impact getting a mortgage?

Those applying for payday loans online are often considered to be financially stretched and in need of desperate funds. Whilst this may be the case for a percentage of customers, this does not consider the large proportion who use payday loans for emergencies or to cover temporary shortfalls of cash.

However, mortgage lenders and brokers treat these loans in the same way they would for any other kind of loan such as a personal loan.

What mortgage lenders and brokers care about

The mortgage sector looks at finance in the same way as other types of unsecured debt, such as credit cards or personal loans.

What matters most to mortgage lenders and brokers when deciding to approve or decline an application is how you previously managed your debt.

For example, as with any other type of unsecured debt, what will be assessed is your repayment history such as:

• Did you always pay on time?
• Did you miss payments?
• Did you default on the loan entirely?

All these factors have a much bigger impact on whether your mortgage application is approved or not. Lenders want to see you can repay loans on time.

What impacts your chances of being approved for a mortgage?

It is worth noting that your loan repayment history is not the only determinate of whether or not you are approved for a mortgage. Other important variables include:

• Affordability checks: lenders carry these out to ensure you can afford to take out the loan. If after taking into account your income,  credit history, and future expenses it suggests you would be put into financial difficulty, then a loan is unlikely to be granted
• Linked to someone with a poor credit history: if you have a good credit score but your partner doesn’t (and you have linked accounts) this could be problematic. See how do credit checks work for more information.
• Age: a person’s credit score is key to being approved for a mortgage, and when you turn 18 you start with zero credit history. Lenders need to be confident you have experience of paying a loan back.
• Missed loan or credit card payments: this will affect your credit rating as well as your chances of getting a mortgage. If you appear as high-risk to lend to, then your chances drop.

How to improve your chances of being approved for a mortgage

There are a number of ways you can increase your mortgage approval chances:

• Employment status: working for the same company for a number of years can work to your advantage. Lenders will be looking for successful applicants to prove they have a stable, regular income and this would be evidence of that
• Good credit rating: lenders like low-risk applicants. A good credit rating will increase your chances of being approved.
• Improving your credit score: you can improve your credit score by making sure you are on the electoral roll and paying off any outstanding debts you have
• Prompt repayments: making sure that you pay back any existing loans or credit cards on time will be considered by a mortgage lender.
• A guarantor: in some cases, you may be able to have a guarantor on your loan and can be particularly useful for younger people trying to get on the property ladder.