Mortgages After Payday Loans

Payday loans are short term instant loans designed to help with emergencies that are typically paid back in a month, usually on your payday. They come with very high interest rates and fees which can be disproportionate to the amount of money you borrow. The average APR paid on a payday loan in the UK is 1250%, considerably higher than the average credit card interest rate of 20.7%. This is why they’re mistrusted and considered exploitative.

The FCA (Financial Conduct Authority) capped the cost of payday loans, limiting the amount of interest and default fees providers can charge. For instance, a person taking out a payday loan for 30 days will pay a maximum of £24 in charges per £100 they borrow.

Payday loans are treated the same by credit agencies as any other loans, which means they can stay on your credit file for up to 6 years. Payday loans are usually marked on credit files as either advance against income, short term credit, or revolving credit. This can make it harder to be approved when applying for a mortgage.

The primary reason why payday loans are an issue for mortgage providers is that they suggest you’re unable to live within your means or manage your money effectively. Yet, a single historic payday loan paid back on time will be acceptable to many lenders if you can adequately explain what the loan was for. For instance, if you took out the loan to pay for emergency car repairs and the rest of your credit file is in good order, it will likely have minimal impact on your application and you'll still get offered the best rates from some lenders.

Using payday loans regularly (and recently), including rolling them over, will indicate that you struggle with managing your existing financial commitments which will significantly reduce the potential lenders and deals available to you – a history of using payday loans could also restrict you to lower LTV products. Lenders want to be sure that you will meet your mortgage repayments every month, but a history of payday loans will suggest make you appear a big risk.

If you've had a payday loan in the past, there are a couple of ways you can improve your chances of getting a mortgage approved.

Provide a Larger Deposit

Payday loans can negatively impact your credit history and score. Providing a larger deposit essentially reduces the risk taken on by the lender and gives you access to more products with potentially better rates.

Get Advice from an Independent Specialist Mortgage Broker

Specialist mortgage brokers like John Charcol can help you find the best mortgage product for your circumstances and payday loan history. As an independent broker, we have access to a broad range of products and lenders – including adverse credit lender that only work through intermediaries - and can help you secure a loan with the best possible rates for your situation.

Improve Your Credit Score

Taking out one or more payday loans can impact your credit score, especially if you've failed to repay them on time. Improving your credit score will go a long way in helping to boost your chances of being accepted for a mortgage.

Pay Off All Outstanding Debts

By clearing all your outstanding debts in full and settling defaults, you can show lenders that you’re financially responsible and know how to manage your money. It will also go a long way in helping you improve your credit score.

Avoid Taking Out a Lot of Credit in a Short Amount of Time

You shouldn’t apply for a lot of credit in succession, as this can result in a lot of hard credit checks which can damage your credit score. can signify that you’re struggling to manage your finances or live within your means.

Lenders assess remortgages in much the same way as a standard mortgage. Your payday loan history will have a very similar impact on your application, such as restricting your borrowing options and increasing your rate. It's worth speaking to a specialist mortgage broker like John Charcol, who can advise on the most suitable lender for a remortgage based on your payday loan history. You might require an adverse credit lender that assesses each mortgage application on a case-by-case basis – which are only often available through intermediaries such as John Charcol.

If you've taken out one or more payday loans in the past, you must check your credit report before applying for a mortgage. Understanding your financial history and how you look to potential lenders can help you save a lot of time. After all, if you don't meet a lender's criteria for a mortgage, there's no point in applying to them. Being rejected for a mortgage can mean a delay, waste money on application fees and negatively affect your credit report, which you should do your best to avoid.

Payday loans remain on your credit report for 6 years. If you have one on your credit report, paying it off as early as possible can help reduce the negative impact it has on your credit score over the long term.

It’s worth bearing in mind that a payday loan that was satisfied 5 years ago will have less of a negative impact on your application now than one that was satisfied in the last year.

If the lender declines your application, it's a good idea to work with an independent specialist broker like John Charcol who can find a lender that’s more likely to accept you. We know which mortgage lenders are more likely to reject payday loan mortgage applications and can ensure you only approach a lender with criteria that aligns with your situation.

Other options include waiting a while before applying for another mortgage so that the payday loan isn’t as recent and actively improving your credit score – both of these will give you more options in the future.

If you've defaulted on a payday loan, you'll find that the pool of lenders willing to accept your mortgage application will shrink significantly. Missed payments can seriously harm your credit score and if you've been unable to pay a payday loan back, it signals that you have serious credit issues. In this situation, John Charcol will work with you to find a suitable adverse credit lender that reviews applications on a case-by-case basis.

It's worth noting that the further back in your credit history the payday loan default, the less of an impact it’ll have on your credit score and the more mortgage options potentially available to you.

Payday loans can impact the lenders and deals available to you but they won’t necessarily stop you from getting a mortgage.

In order to ensure you give your self the best chance of securing a competitive deal, speak to a mortgage broker like John Charcol.

We’re a whole of market mortgage broker who can match your specific circumstances with the right lender. To find out more about mortgages after payday loans, contact us at 0330 433 2927 or submit an online enquiry.