Mortgages and overdrafts

jep51

I know on the face of it this sounds like a stupid question but hopefully once I explain it will seem less so

I have just left university a year ago, have a deposit to put down and right now I am simply waiting until my current rental contract finishes in about 8-9 months before I can buy. I am planning to start looking and meeting with banks etc. in January or February.

My question about overdrafts: I have 2 current accounts. One is a student account and the other is a regular current account. My student account became overdrawn in my 2nd year and when I left I had pretty much all of the £2k limit out. I paid this off, in full, about 6 months ago – I am assuming (but correct me if I’m wrong) that the initial overdrawing will not be a problem as so many students go into their overdraft. However, it is currently overdrawn by £1k which is just sitting in a savings account (it’s an interest free overdraft so I thought it would make sense to be earning interest on it if I could).

My second current account has a (free) overdraft limit of £250. I have, at most, been to within about £70 of this limit. This is also for the reason of savings. I tend to use my credit cards for everyday purchases, and so I put my salary every month into a savings account for 3 weeks or so until my bills are due, then put it back in my current account and pay. During the month, I inevitably make some purchases on my debit card, including cash withdrawals, and this simply comes out of my overdraft while I have the rest sitting in savings earning interest.

I have never been over the interest free overdraft limit on either account. I have never been late for any bills, and I have never had to pay any penalties to my bank. Nevertheless I am conscious that when I apply for a mortgage, the very fact that I have been overdrawn will be a problem, and they will not care that I am only doing it to earn interest on what is effectively an interest-free loan. So rather than risk a mortgage application for earning not-much interest I thought I’d check if this is even potentially a risk?

Thanks

dimbo61

Lenders do not like it when you are living in your overdraft every month!
It shows poor money management and you now want to borrow WHAT £80/100,000?
Try and spend less for the next 8/9 months and do not go overdrawn and build up savings
Bigger deposit the better

jep51

Try and spend less? This is nothing to do with the amount I am spending. Absolutely nothing. I have paid off my credit card bill in full every month for my entire credit history.

This is simply because I am effectively putting my overdraft into a savings account so I can earn interest on it.

To clarify further, if this is likely to cause a problem I can easily not put it in a savings account - I just thought if I can earn an extra £60 or so then I might as well, and want to check if its likely to be a problem.

Yorkie1

The lender will just see you living on debt every month. As the advisors have suggested, do not keep dipping into it every month. Use the savings to ensure you permanently stay in the credit.

Kynthia

Even though you seem to be using debt sensibly, when looking to get a mortgage you have to consider what they think. The brokers on here tell us that lenders view regularly using an overdraft, even an agreed or interest free one, is looked upon unfavourably. Therefore what I'd do is about 4 months before you think you'll be offering on a property, take out the necessary savings to pay off any overdrafts and don't go into them again. Thus way you'll have at least 4 months of statements that show no overdraft use to give a potential lender.