In this brief guide, we are going to answer the question “how does having a loan affect mortgage renewal?”.

How does having a loan affect mortgage renewal?

Having a loan may affect your mortgage renewal as mortgage lenders will want to see how much debt you have and what your monthly disposable income is each month

Mortgage lenders will look to ascertain your mortgage affordability before a mortgage renewal and your debt to income ratio will play a big factor in if you are able to afford a mortgage.

Most mortgage lenders also have a debt to income ratio cap which they use and will not lend to borrowers who have a debt to income ratio above this cap.

Having a loan may, therefore, increase your debt to income ratio and subsequently reduce your mortgage affordability.

To calculate your debt to income ratio you should add up all of your monthly debt repayments and divide this by your monthly gross income( this is your income before tax deductions).

This will then give you a debt to income ratio but if you multiply it by 100 it will then give you a percentile of your debt to income ratio.

It also depends on how long ago you got the loan.

If you got the loan pretty recently then you may find it much harder to get a mortgage renewal as it could affect your mortgage affordability.

Why is this?

This is because when you apply for a credit product the credit provider runs a credit check to see if you are eligible for the credit product.

This credit check is a hard credit check and it leaves a publicly visible record on your credit file.

You can check your credit file and score to see if the credit search by the credit provider was recorded on your credit file.

 Credit providers usually report data to the credit bureaus every month and this means that you may need to wait at least a month to see what the effects of the loan are on our credit file.

If you are unsure of what your credit score is then you should check your credit score from the four credit bureaus in the UK: Experian, Crediva, Equifax and Transunion.

Some of these credit bureaus may charge you a fee to view your credit report so what you can alternatively do is request a statutory credit report which is a free credit report which each credit bureau must provide to you upon you requesting it.

Alternatively, you can also use credit score services such as Checkmyfile and clearscore to check your credit report.

You should regularly follow tips to build your credit but this may be more important if you are looking to get a mortgage renewal.

How to build credit

Below are some of the tips you should use to build credit

-Pay your bills on time and in full

-Expand your credit. The more types of credit you have which are all paid on time the better your score.

-Register to vote on your main home address

-If you rent and pay your rent on time, then report this to the credit bureaus.

-Ask for a credit limit increase

-Check your credit report for any errors

-Don’t close or cancel Bank accounts or credit cards. The longer you have these open, the better.

-Use only 30% of your available credit such as overdraft or credit cards. This shows that you are not too dependent on credit

-Do not make too many credit applications within 3 months. 1 every 3 months is is acceptable.

-Avoid getting rejected for credit and only make applications where you have a 95% chance of approval or are pre-approved.

-Avoid adverse credit such as payday loans

-Avoid maxing out your credit card or going over your limit as it makes you seem dependent on credit. You might also incur a few fees from your credit card provider.

-Ensure you do not default on any repayments-, even if this is not credit as you can still have negative marks due to owing people or companies from things such as county court judgements, Bankruptcy or Individual voluntary agreements.

Always inform your credit provider if you are having difficulty and they could work something out with you rather than selling your debt to a collection agency which will cost you more

Use a mortgage broker to get a mortgage

You may want to consider using an independent mortgage broker to get a mortgage.

Mortgage brokers are important as they can access mortgage products from across the whole of the market in some cases.

This could be over 11,000 mortgage products. This may have some advantages rather than going directly to a mortgage lender.

A mortgage broker will look to understand your financial circumstances and then provide recommendations on which mortgage products may be suitable for you based on your mortgage affordability.

After giving you these mortgage recommendations, most mortgage brokers will seek your consent to apply for a mortgage in principle. 

This will allow you to shop for your home easier as more estate agents and sellers may take you seriously or it will give you confidence that your mortgage is indeed a possibility before you make a full mortgage application. 

Once you have found a home you want to buy and are satisfied with the mortgage offer for your mortgage then the mortgage broker will then look to get you a mortgage offer.

This will come with a key facts illustration document which details out the features of your mortgage including how much you will pay per month.

It will also contain information on if there are any limits such as early repayment fees, or annual overpayment limits.

If you are happy with everything you can then go on to secure your mortgage with the help of a conveyancer.

Your conveyancer will manage the legal searches on the property to ensure there aren’t any issues with it.

They will oversee the sales agreement to ensure it is in your best interest, they will manage the transfer of mortgage funds, exchange contracts with the seller or their conveyancer and set a completion date with the seller or their conveyancer.

In this brief guide, we answered the question “how does having a loan affect mortgage renewal?”.

If you have any questions or comments please let us know.

John Bate

John has 22 years of experience in financial services. This spans across financial research, financial services (As a qualified mortgage broker and underwriter), financial trading and sales at global investment banks. While working as a publishing research analyst, he covered European bank credit and advised institutional clients on investment strategies at both JP Morgan and Societe Generale. John has passed all three levels of the CFA (Chartered Financial Analyst) programme.