Credit Commitments and Affordability

Posted on 2 February 2011 by Gemma

We brought our property last year on a 2 year fixed rate. The mortgage was for £115,000 but the property is worth roughly £180,000. We have since took out a bank loan and I'm now worried this might effect us next year when it comes to re-mortgaging. We did also want to try interest only for a few years to try to clear our debts. Do you think this will effect our chances?


When your Fixed rate comes to an end next year you have 3 options. Stay with your existing Lender and revert to the follow on rate quoted in your mortgage offer, transfer to a new fixed rate with your existing Lender or remortgage to a Lender. If you elect to do either of the first 2 then I would not expect your bank loan to cause an issue. Whether or not it causes an issue if you choose to remortgage will very much depend on the size of your monthly loan repayments. Lenders will usually make a deduction from your earned income, roughly the annual equivalent of your loan repayments and use this net income figure as the base for their affordability calculations. To see what effect this will have I recommend that you use some of the "how much can I borrow?" calculators you will find on Bank and Building Society websites.

With regards to switching on to an interest only mortgage you need to understand that whilst you will have lower monthly payments you will not be repaying any of the capital. This capital has to be repaid at some time and will continue to attract interest charges until it is. I do not think switching to interest only will adversely affect your chances when remortgaging unless you Lender decides to enter it as a payment arrangement on your credit file. This would have a very detrimental effect and whilst I don't think they would, you should ask this question if and when you apply to switch.


Answers provided in response to Ask the experts are based on the information provided and do not constitute advice under the Financial Services & Markets Act. They reflect the personal views of the authors and do not necessarily represent the views, positions, strategies or opinions of John Charcol. All comments are made in good faith, and John Charcol will not accept liability for them.

We recommend you seek professional advice with regard to any of these topics where appropriate.

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