Arranged overdraft usage question from mortagage lender

poppy_tabitha

I have just applied for a mortgage. I do not have adverse credit but I have recently paid off a credit card and myself and my partner (joint applicants) have used our arranged overdrafts quite regularly. We clear them every month (e.g pay in £2000) but then we usually max them out again by the end of the month through living costs so we are back at -£1000 before payday. We have paid one off with savings this month and will pay off the other one at the end of this month on our next payday. 

I have been asked to explain the credit card debt which increased in the last 12 months (and is now paid off) and also the overdraft usage by the lender. Is this likely to prevent us from getting the mortgage? It’s paid for furniture and a holiday. Our affordability from income perspectives is much higher than we have asked for. 

Thrugelmir

Perhaps the lender has concerns that the control over your personal finances isn't great. Why borrow unnecessarily when you have savings? 

poppy_tabitha

The cost of the overdraft fees were less than the amount we could earn by putting the money in a LISA. The savings we’ve paid off the credit card and overdrafts with have been saved separately over the last 3 months though. 

But thanks for the reply - I wondered if this is a standard question from lenders as we won’t be the first people to apply with debts - or whether they are more specifically targeting our finances. 

AdrianC

It's very simple...

You are spending somebody else's money, EVERY SINGLE MONTH. Don't.

Spend less, so that you spend YOUR money.

Yes, you're holding steady - you spend £2k, you earn £2k. But you owe a grand at the start of the month, and you owe a grand at the end.

You have savings in another account? Stop compartmentalising. Think about your net assets. If you can't spend less, take a grand out of the savings, and pay the overdraft - so you start and end level - then be honest with yourselves.

poppy_tabitha

Thank you. Does anyone know what makes using an arranged overdraft and clearing it in full each month different to putting all of your spending on a credit card each month and then clearing the balance when the statement arrives every month? Isn’t using and then paying off debt good? 

Just trying to get a better understanding around good and bad uses of debt. Why is an overdraft bad and a credit card good? 

Our broker did not think this was an issue for us - and I checked with another one to be extra sure. Maybe I should have checked with a third! 

Nebulous2

Credit cards used and paid off every month are free. A savvy way to extend a payment period. 

Overdrafts are expensive and are a reserve / backup option.  Paying relatively high rates for unplanned debts appears like either poor budgeting or desperation. 

Cheese1990

Overdrafts are seen by banks as an emergency buffer for that emergency car maintenance that's just come in at the end of the month, regular usage just makes it look like you don't plan and are constantly overspending above your means.

Rudi1990

I just got a mortgage with adverse credit history and constant usage of my arranged overdraft- same situation as you - salary clears the overdraft each month but once rent and direct debits go out and a few weeks of living costs later I’m back in it.
The only condition attached was that the overdraft is cleared prior to completion, it’s worth telling the lender you will pay it off immediately if they are questioning it