Can Buying a Car Affect My Mortgage Application?
Buying a car can affect your mortgage application by reducing the amount your lender may be willing to grant you. Buying a car with cash is usually the safer option; it won't add to your total debt, and depending on its running costs, may not overly affect your affordability.
Buying a car on finance can significantly reduce your borrowing capacity, particularly if the regular repayments are high, the term of the loan is long, or the total cost of the car raises your total personal debt beyond what the lender is comfortable with.
64% of first-time buyers have car finance (Choose My Car) and the average car payment in the UK is £160–£280 per month (Money Expert).
Failing to make credit repayments in full or on time, whether on car finance or any other personal loan, can negatively impact your credit score, making you appear riskier to lenders. You should never take on debt that you can't reasonably afford to repay.
This article explores the varying potential impact on your mortgage application when: buying a car, buying a car on finance, and refinancing a car. If you have already bought a car and want to explore your mortgage options, arrange a free mortgage consultation with our 100% impartial advisors.
Can buying a car with cash impact my mortgage application?
Purchasing a car with cash can still affect your mortgage application in two ways:
Reduced deposit
The amount you spend on your car is cash that isn't going towards the deposit on your new home. You will need a minimum of 5-10% of the purchase price to get started, although some first-time buyers may be able to secure a mortgage with no deposit.
Generally, higher deposits, with a lower loan-to-value, will get you better mortgage rates. So, a 0-5% deposit is likely to mean you'll be paying a higher interest rate on your loan than a 20-25% deposit
Monthly affordability
Additionally, the running costs of the car will increase your monthly expenses, leaving less available in your lender's calculation of what they believe you can afford to pay them each month. This may reduce the amount they are willing to lend you, or extend the term of your mortgage offer.
For example, they may lend you the same amount as if you did not run a vehicle, but determine that you will need to make smaller monthly repayments over a longer loan term. This would make your mortgage more expensive overall, due to the interest paid over the longer duration of the loan.
The more affordable your car is to run, tax, insure and maintain, the lower its impact on your mortgage.
Does buying a car with credit affect my mortgage application?
Regular monthly repayments do reduce your borrowing capacity, but the good news for borrowers is that the size of the impact is now greatly reduced. Updates from the Financial Conduct Authority affecting affordability assessments for mortgages mean that a £345 monthly car repayment will now reduce your borrowing capacity by just £5,000, versus over £18,000 a year ago (analysis from Coventry Building Society).
Having a car on finance does not necessarily mean your credit score is impacted. It's important, however, to keep your credit score healthy by making your payments on time.
Making regular credit repayments can actually improve your credit rating, aiding your mortgage application by proving to lenders that you can reliably repay your debts. If you need to improve your credit score, consider buying a car on finance at least 6 months to 1 year before your mortgage application, and pay the debt off in full before your mortgage begins.
Should I buy a car before buying a house?
The answer will always depend on whether you can comfortably afford to pay the car off before you buy your house, and run it alongside your budgeted monthly mortgage payments. Having your own transport may benefit you in your house purchase in two ways:
Increase your job opportunities
Having your own car can give you better access to better-paid jobs, jobs which are further afield, and jobs which require your own car. In some cases, having a car can cost less than the potential increase in earnings, which will boost your mortgage affordability.
A NatCen Social Research study for the University of the West of England found that "Having continued car access is associated with a 25% increase in personal income over a two-year period, compared to not having car access."
Widen your house search
Homes in locations nearest to good and plentiful job opportunities, and/or with great public transport links, often come at a premium. If you have your own car, you can broaden your house search to lower-priced areas, which could shave thousands off your property purchase and mortgage.
According to Nationwide, homes within 500 metres of a train station are 8% more expensive in London (+£42.7k), and 5% more expensive in Manchester (+£10.9k), than similar properties 1,500 metres away.
What do Mortgage Lenders evaluate?
It's understandable that lenders are very thorough when evaluating applications. Defaulting is a very real and serious issue that can arise, hence the thorough checks. Here are some of the factors mortgage lenders will assess during the application process:
- Credit history: Your credit score isn't the only factor lenders consider. Lender's will look at your payment history, i.e, if you've made payments on time, how many commitments you have on finance, and other red flags such as bankruptcy. These factors will ultimately affect your credit score, however.
- Steady income: It's essential to have a stable income that is visible to the mortgage lenders. It needs to be clear where you are getting your money from, and it will often be verified via your pay slips.
- Debt-to-income ratio: Your debt-to-income ratio indicates to lenders how much of your money is going toward debts. Student loans and finance agreements are just a couple of examples that can increase your debt-to-income ratio.
- Your deposit: How much money you'll be putting down as your deposit directly links to your mortgage. Some lenders demand a higher percentage, while some go as low as 5%. The more you put down for a deposit, the less you'll have to borrow from the mortgage lender.
Will refinancing my car affect my ability to buy a house?
Refinancing your car while paying off a lump sum of the loan may improve your mortgage affordability by lowering your debt. However, it may incur additional costs, such as an early repayment charge and processing and application fees.
Refinancing for lower monthly payments will usually extend the term of the car loan, increasing the interest payable over time and your total debt; this could lower the amount your bank may be willing to lend you for your home.
Our brokers will present the best options available to you, for any type of mortgage, including:
- First-time buyers, home movers and buy-to-lets;
- Employed; self-employed or director mortages;
- Mortgages for non-UK residents or non-UK citizens;
- Bridging loans;
- Bad credit mortgages;
- Guarantor mortgages;
- Joint borrower, sole proprietor mortgages; and
- Absolute, Possessory, Good, or Qualified Title.
Caragh is an excellent writer and copy editor of books, news articles and editorials. She has written extensively for SAM for a variety of conveyancing, survey, property law and mortgage-related articles.
Andrew started his career in 2000 working within conveyancing solicitor firms and grew hands-on knowledge of a wide variety of conveyancing challenges and solutions. After helping in excess of 50,000 clients in his career, he uses all this experience within his article writing for SAM, mainstream media and his self published book How to Buy a House Without Killing Anyone.
