How will taking out a loan affect my chances of buying a house?

Watermarc

Hi everyone.

I don't really want to go into the why's and wherefore's, but I am considering taking out a loan for £7000 at 3.3% over 2 years.

The crux is that my wife and I are hoping to buy a house in the next 12-18 months, so I will probably have paid back at least half the loan before we start mortgage applications but it will not be completely cleared. My question is how much would the loan affect our ability to get a mortgage, the rates etc?

Some background:

• I'd much rather use savings than take a loan, and I do have more than £7000 saved up, however it's in a Lifetime ISA for my house deposit, so I can't withdraw without penalty
  
• My credit score is currently very good, however my wife's score is likely* not very good just now. We are working to improve it over the next year, hence the house buying timetable of 12-18 months. What we don't want to do is work very hard to improve her score, and then ruin my own score and affordability by taking out a loan.
• I've looked at taking the above loan out for just 1 year so that it finishes before we start the house hunt but can't afford the repayments, hence it has to be 2 years.

I know this is all very hyperthetical and I know everyone's situations are different, but any guidance on if the loan will affect the mortgage application severely/moderately/slightly/not at all would be great.

Also, the loan is not guaranteed. MSE says I have a 70% chance of getting it, which I'm willing to try for, but what if I get turned down? Will that affect my mortgage application?

*It's really annoying but we can't actually know my wife's score because she only moved to the UK last year and you need at least 3 years address history to register for MSE or ClearScore. We are assuming it is basically 0 because she has no credit history and we are building it up with a LoqBox "loan" which will mature in 10 months time. Hoping to also get her a credit rebuild card as well to boost it further, but really no idea what we can expect to achieve with her score and planning for my income and score to be the main cornerstone of the mortgage application.

[Deleted User]

It'll reduce your affordability. Whether it will be critical will depend on the numbers. If it's cleared before your mortgage then it will no longer be an affordability issue but will be a part of your history of using credit. 

Ignore your scores. They're not used in lending in the UK. Lenders only look at your history and circumstances.

Tranboy

I'd never taken out a loan or credit cards prior to my mortgage application, I didn't have bad credit history,  worse I had none so with the help of a mortgage advisor and a 20% deposit I eventually secured a mortgage after a lot of ringing around by the advisor.Lesson learnt I made sure to get some credit cards , use them regularly and always pay them off in full. I paid for the mortgage advisor as I was a complete innocent,  I know you can get them fee free and upon my 2 year fix ending they kindly offered their services to me again but by this time I was older and wiser so did my own hunting around for a new deal with an LTV of less than 70%.

Watermarc

Deleted_User said:

It'll reduce your affordability. Whether it will be critical will depend on the numbers. If it's cleared before your mortgage then it will no longer be an affordability issue but will be a part of your history of using credit. 

Ignore your scores. They're not used in lending in the UK. Lenders only look at your history and circumstances.

Thanks for replying @Deleted_User

I can see what you mean on the affordability front. I may be able to comfortably afford £300/mth to service the loan, however I guess from a mortgage lenders pov that's £300 less I can afford to pay them.

Do your scores not affect the rates and terms you are offered for a mortgage though?

MalMonroe

"Do your scores not affect the rates and terms you are offered for a mortgage though?"

No. Nobody except you ever sees your scores. Lenders use their own scoring system/s.

"Also, the loan is not guaranteed. MSE says I have a 70% chance of getting it, which I'm willing to try for, but what if I get turned down? Will that affect my mortgage application?"

If I had a 70% chance, I wouldn't apply because I wouldn't have much confidence - it's a bit low. And then there will be a hard search on your credit report.

There's some helpful information in this link from Citizens Advice -

https://www.citizensadvice.org.uk/debt-and-money/borrowing-money/how-lenders-decide-whether-to-give-you-credit/

When they refer to scores they mean the scores that lenders give you themselves, not the ones on your credit report.

It might be a good idea, when you are wanting to apply for a mortgage, to consult an advisor, as Tranboy did. 

If you're not desperate for that loan, why not just put £300 into savings for 2-3 years, since you say you could comfortably do that to pay back a loan? You might even get a bit of interest (although I know that rates are currently quite poor) instead of having to pay interest.

Watermarc

thanks @MalMonroe .

The loan would be to cover an immediate expense that I don't have cash for right now, otherwise I wouldn't be considering it. I agree, I'd rather the % chance was higher, however the loan is from my own bank and I have previously recieved a letter from them offering me the same deal. I know it's not cast-iron but it makes me think the chances are likely higher than MSE proposes.

Regarding credit scores, I do realise the one I see on MSE/ClearScore has no direct relevance to lenders, it is merely an indication of how financially attractive my wife and I look.

Thanks for all the comments. On balance I think the hit to my affordability that taking the loan would mean for my mortgage is probably the biggest issue and might not be worth risking unless I can pay the loan back before any future mortgage application. I shall try and find another way of raising the money.

Ebe_Scrooge

Watermarc said:

Regarding credit scores ... it is merely an indication of how financially attractive my wife and I look.

For future reference, you need to realise that this statement is absolutely untrue.  Your score gives no indication whatsoever of how a lender will view you.  At best, it gives an indication of stability.  Your score will drop in response to any change in credit circumstances, whether good or bad.  It will gradually rise over a period of stability.

For what it's worth, I think you're being very sensible in deciding against the loan.  But I just wanted to reiterate the point that your score is as much use as a receptacle constructed from cocoa solids and milk, used for brewing tea :-) 

Sncjw

What expense is the loan for? 

Brie

Have you tried a balance transfer on your credit card(s)?