Will my £5k overdraft limit count against me?

MagicMoneyTree81

About to apply for a mortgage and realised I've potentially overlooked something calamitous.

Until about 5 months ago I was going deep – sometimes near the limit – into a 5k agreed overdraft every month – it’s something First Direct happily agreed to about three years ago during a period of low income.

Knowing we were soon trying to buy a house I took out a loan to get into the black and clear some credit card debt (most of which was an interest free card to buy a car). I’ve stayed in the black since and the four months’ statements typically required by lenders all show that.
But the overdraft limit still sits, like a bright red warning light, at 5k – which will show on the statements. Now I’m kicking myself for not reducing it months ago.

The lender, I am imagining, will look at that and think: why does he need such a huge limit? Seems like a problem.

My credit score is top notch, I’ve never missed a payment and have only once or twice, many years ago, gone over my overdraft limit – and even then by about £10 for 24 hours.

Questions:
• Is this likely to be as big a problem as I think?
• Will they ask to see older statements showing use of that overdraft?
• Are some lenders likely to worry more than others and should I choose my lender on that basis?

Thank you in advance…!

BoGoF

There is no such thing as a top notch credit score so forget that as a plus. The fact you were deep in a £5k overdraft shows how inaccurate they are.

That said having an overdraft available shouldn't in itself be a problem as long as they don't ask for statements going far enough back to show usage.

MagicMoneyTree81

BoGoF wrote: »

There is no such thing as a top notch credit score so forget that as a plus. The fact you were deep in a £5k overdraft shows how inaccurate they are.

That said having an overdraft available shouldn't in itself be a problem as long as they don't ask for statements going far enough back to show usage.

Thank you for taking the time to reply. As I understand it, a credit score is a measure of your reliability in terms of paying your debts on time and in full and I have always paid my debts. The fact I have acquired them foolishly, to my own detriment, is a case of more fool me and good for the lender - they get a customer, they get their money back with some interest.

Maybe over-egging the top notch but it's a very high score. But you are right to some degree in that mortgage lenders look well beyond just your credit score.

Thrugelmir

Your loan and credit card debt will be factored into affordability assessment. Limits have little bearing. What will be noticeable is the high level of debt over an extended period of time. Reducing your overall indebtedness is the way forward.

EasyAs123

MagicMoneyTree81 wrote: »

Thank you for taking the time to reply. As I understand it, a credit score is a measure of your reliability in terms of paying your debts on time and in full and I have always paid my debts. The fact I have acquired them foolishly, to my own detriment, is a case of more fool me and good for the lender - they get a customer, they get their money back with some interest.

Maybe over-egging the top notch but it's a very high score. But you are right to some degree in that mortgage lenders look well beyond just your credit score.

Mortgage lenders will look at your credit history they will not look at or consider in any way your credit score (which is a number made up on demand by your credit reference agency in order to sell you their products).

Part of that history will be the documentation you provide (like bank statements and proof of income) and part of it will be from whichever of the three credit reference agencies the lender uses - but the information provided will be raw data and crunched by the lender according to the lender's criteria (which can vary drastically from the way the credit reference agency process the data, mostly because the credit reference agency don't consider affordability).

BoGoF

MagicMoneyTree81 wrote: »

Thank you for taking the time to reply. As I understand it, a credit score is a measure of your reliability in terms of paying your debts on time and in full and I have always paid my debts. The fact I have acquired them foolishly, to my own detriment, is a case of more fool me and good for the lender - they get a customer, they get their money back with some interest.

Maybe over-egging the top notch but it's a very high score. But you are right to some degree in that mortgage lenders look well beyond just your credit score.

A credit reference agency credit score is a meaningless number and not worth the papers it's written on.....your lender will never see them.

There is 'good' credit and 'bad' credit. Being constantly deep into a £5k overdraft is the latter.

ACG

All you have done is replaced your overdraft with a loan. You are in no better or worse position as such other than now you have a loan AND a £5k overdraft facility. I would reduce that facility down if nothing else but to stop you being tempted to run it up again so you then have a loan and an overdraft.

Funnily enough, I had a similar conversation with a customer last week. There are lenders who would not be interested in an overdraft balance for affordability where as a loan (or credit cards in their case) they would.

From a broker/lenders perspective, I would be interested in knowing how you managed to get a £5k overdraft and why you could not reduce it down without taking out credit (I dont want an answer on here, I just meant if you were our customer).

It is unlikely to be a deal breaker but without knowing a lot more it is impossible to say. Some lenders will probably pull you to pieces over it, most lenders are unlikely to.

HampshireH

The lender will look at the amount you have on the loan.

If its a new loan they may actively ask to see what accounts it has been used to pay & the statement trail.

Don't rely on the lender only wanting to see 4 months.

Ours initially wanted 3, then 6, then 12 months of statements across all accounts (We had 0 debt but multiple accounts with various interest rates to maximise savings) to evidence continuous income which we were putting into savings for our deposit.

You don't specify how big a loan you took but the repayments will very much be included in your affordibility assessment. Sadly what you may deem affordable the lender may not.

I suppose the main question could be how did you save for a deposit when you needed a loan to bring all your debt under one roof so to speak.

If your mortgage is declined (fingers crossed you will be fine) would it be more beneficial to pay off the debt before reapplying.

MagicMoneyTree81

HampshireH wrote: »

The lender will look at the amount you have on the loan.

If its a new loan they may actively ask to see what accounts it has been used to pay & the statement trail.

Don't rely on the lender only wanting to see 4 months.

Ours initially wanted 3, then 6, then 12 months of statements across all accounts (We had 0 debt but multiple accounts with various interest rates to maximise savings) to evidence continuous income which we were putting into savings for our deposit.

You don't specify how big a loan you took but the repayments will very much be included in your affordibility assessment. Sadly what you may deem affordable the lender may not.

I suppose the main question could be how did you save for a deposit when you needed a loan to bring all your debt under one roof so to speak.

If your mortgage is declined (fingers crossed you will be fine) would it be more beneficial to pay off the debt before reapplying.

Thank you! I took out an interest free credit card to pay for a car (used, modestly priced, essential for family of four) – it was cheaper than taking out a car loan.

Later I paid off the card with the loan because I gathered that lenders would lend a larger amount if the debt was in loan rather than credit card form. However, I made sure this loan was big enough to also clear the overdraft and a bit of other credit card debt (again, interest free).

However, in the months leading up to this I was still reducing my debt gradually each month, and in the months since I have remained in the black and continued gradually improving my position. It’s been inconsistent – one month saving £500, the next perhaps overspending by £200 – but the overall trajectory has been overall reduction in debt over time.

Confused? I bet. Explaining all this to the lender could be a huge headache as there are so many accounts and cards involved. I wish I’d just taken out a large loan a year ago and simplified it then. Ah well…