No, taking out a payday loan does not affect your chance of getting a mortgage. According to different mortgage advisors and brokers that we have confirmed with, most providers consider a payday loan to be like ‘any other loan’ regardless of the fact that it is commonly used by people who are pay cheque to pay cheque.
When applying for a mortgage, you will commonly undergo checks of your credit history and affordability – and this will include looking at any previous credit cards, personal loans and bills that you have had and how well you have repaid them.
Many applicants worry that having a payday loan in the past will affect them for future mortgages and bridging loans – but this is not the case.
What is a payday loan?
A payday loan refers to borrowing a few hundred pounds (around £100 to £1000) and receiving the money upfront, and repaying in full on your next payday. It is often used by people who cannot wait until their next payday to pay for something and need the money upfront. It is best suited for emergencies, including:
- Car repairs
- Household bills
- Medical bills
However, payday loans are also often abused for shopping and gifts.
Around 5.4 million payday loans online were issued in the last year in the UK by around 40 lenders, according to the FCA.
Note that the number of active payday lenders in the UK is decreasing rapidly since the number of lenders able to withstand FCA regulation is falling.
Why is a payday loan considered bad for a mortgage?
For some mortgage brokers and lenders, they consider payday loans to be bad for mortgages. This is because such loans are regularly used by people who are behind on their bills and desperate for funds, hence their eligibility for a mortgage should be questioned.
Some lenders will consider, if a person cannot make it until payday, how can they pay for a mortgage and bills every month?
However, rest assured, most mortgage providers look at payday loans as being ‘like any other loan’ because many will consider that emergencies can occur that can put you behind your payments.
For instance, if you live in rented accommodation and have a large heating bill, have to help out your family or pay for a funeral, borrowing £500 and repaying it back on time should not stop you getting a mortgage and moving up in life.
Some lenders will be stricter than others
Regrettably, some mortgage lenders will be dismissive of payday loans and people that use them and it may jeopardise your ability to receive a mortgage offer.
However, it is noted that every mortgage lender is different and in this day and age, we live in a world of specialist finance companies. The requirements for someone like NatWest and Barclays is going to be very different to someone like Masthaven and Precise Mortgages.
Depends on what terms – how long ago, did you repay?
Some mortgage companies are willing to look at payday loans on a case-by-case basis. For example, if it was taken out several years ago by the individual and repaid on time, this should not impact your chances of getting a mortgage. Lenders may differ as to whether this is 1 year, 3 year or 5 years ago.
Equally, did the borrower take out one payday loan or are they a habitual user and still owning funds. This will be taken into consideration.
Naturally, lenders are concerned about managing risk and if they determine that an individual cannot afford a mortgage, they will base this on multiple factors and not just payday loans.
