30th October 2013
As the number of potential home buyers increases, mortgage broker John Charcol has warned potential borrowers that taking out a payday loan can significantly damage their chances of getting a mortgage.
Simon Collins of mortgage adviser John Charcol says: “You can’t turn on your TV these days without being offered a short term loan. Their main purpose is to tide you over to pay day, often because of a wholly genuine and unexpected bill. On the face of it at least, payday loans are pretty straightforward despite the astronomical APRs, with a staggering number of people taking them, but beware the law of unintended consequences; there is a danger that lurks within. Mortgage lenders hate payday loans.”
Although payday loan lenders have now been warned by FCA chief executive Martin Wheatley that he is putting them on notice that tougher regulation is coming when the FCA takes over regulation of consumer credit on 1 April 2014, John Charcol says that a lack of any warning about the impact on the future potential to obtain a mortgage is a glaring omission.
Collins adds: “As far as most mortgage lenders are concerned, if you’ve taken a payday loan, then this is irrefutable proof that you are living beyond your means; end of discussion. A recent payday loan is a massive negative in the eyes of mortgage underwriters but one that no one warns borrowers about. Now, obviously, payday loan companies aren’t going to tell you that taking out one of their loans can seriously damage your chances of getting any mortgage, let alone a top mortgage rate, and lenders are strangely hesitant at least publicly about warning would-be borrowers of the perils of the pay day loan.”
Although a payday loan does not categorically mean borrowers won’t be able to get a mortgage, Collins says it makes it very difficult. “Let’s be clear. A recent payday loan on your credit history doesn’t mean that you can’t get a mortgage, but it almost certainly rules out most of the major high street lenders. And elsewhere, if a mortgage offer can be agreed, the rate is unlikely to be particularly competitive.
“The whole payday loan situation is a perfect example of the lack of financial education in the UK. There’s plenty of regulation, along with abundance of wordy small print, but no one to really explain the actual consequences of how things like payday loans can affect you, and your financial position. Even the new chairperson of the Financial Services Consumer Panel thinks they’re perfectly ok in certain circumstances, and that using one to pay for a night out is exactly the same as putting the cost on a credit card! So it’s buyer beware, because no one else will tell you.”
Collins says that the first thing you should do if you’ve taken a payday loan is to get an up to date copy of your credit file, to see what a lender will see about you.
“When you’ve got this, we can start to assess the likely impact on an application. Although many of the leading mortgage rates are from lenders who have zero or very little tolerance on Payday loans, there are still lenders in the market who can take a more pragmatic view, and once we have a fuller picture we can see how best to proceed”.