Recent research carried out by mortgage brokers shows that taking out a payday loan does not affect your chances of being approved for a mortgage.
Payday loans are available from online lenders and high street stores and involve borrowing a few hundred pounds until your next pay date. They are commonly associated with those in need of desperate funds who cannot wait until their next salary from work to come through.
A stigma has developed over the last few years associated with taking out a payday loan, one which has been heavily influenced by the press. The lenders are regularly criticised for charging high rates of interest that commonly run over 1,000% APR. With a loan staying on your credit record for at least 6 years, many have been worried that a history of high cost credit could affect their chances of homeownership.
There has been further concern that young people looking to get on the property ladder will be denied mortgages, especially since it was reported that 43% of millennials are regularly applying for payday loans. (Source: Mortgage Introducer)
Banks treat payday loans like any other loan
However, research has shown that lenders including HSBC and Halifax simply treat payday loans like any other form of credit, no different to a credit card or personal loan.
The success of your mortgage application is based heavily on your income, employment status and current credit rating. Therefore, it is not important whether you have had a payday loan but rather how well you have paid it.
Not only are mortgage advisors looking for loans that have been repaid on time (including credit cards) but you also want to avoid lots of loan applications. For instance, any individual that has applied for several loans in a short space of time may seem financially vulnerable and therefore may struggle with taking on a secured home loan.
What you can do to maximise your chances of being approved for a mortgage
UK residents instantly receive a credit rating when they are 18 years old and instead of having zero credit or no credit, it is useful to build this up a bit to show mortgage companies that you are capable of paying back loans. There are specific “credit builder” credit cards to help young people or those with bad credit to help build up their scores. They involve low rates of interest and borrowing low amounts.
Other clever ways to increase your chances of getting a mortgage include having a stable and secure income for several months or years. Lenders will feel more confidence knowing that you have a solid income coming through for the foreseeable future. Also, avoiding any links to those with bad credit such as IVAs or CCJs is advised. If you have a joint account with a sibling or parent with poor credit, it is worth separating yourself from their account.