What is more favourable when applying for a mortgage (Personal Loan)? stu2500

#1
Hi, just a quick question in regards to how lenders view personal loans when applying for a mortgage.



I have a personal loan which I pay £200 per month for and has approximately 3 years left to pay (no missed payments and fully up to date). Would I be wise to shop around for a better rate and extend the loan term back to 5 years, therefore reducing the monthly payment prior to applying for a mortgage? Or is it more favourably looked upon when you have less term left on your loan?



Thank you.

#2
Lenders never release their exact policies because they know if they did, everybody would try to "game" the system. And they don't just pull one standard score off a table, they have their own risk and affordability computations so it will vary from lender to lender anyway.



And in reality, the factors will interact with each other.



For example at the moment you have some old loan which you have been dutifully paying off each month with no issues whatsoever on your credit record for that loan, and presumably no new credit applications in the last six months. You probably have no red flags on your credit report in your recent past.



So, subject to you being able to afford the mortgage payments on the amount of mortgage you want (after doing a stress-test to consider the vastly increased amounts that the mortgage payments could cost if they go up to 6%+ in a few years), you would probably get the mortgage OK unless you're being unrealistic about how much you want to borrow.



However, imagine you go and refinance tomorrow and apply for a mortgage next month. Does it look like Stu2500 is in a strong financial position when they run the review of your financial history?



Well, you have taken out a loan very recently... "Taking on a new personal loan agreement right before applying for a mortgage looks like he is effectively borrowing to fund the deposit. Doesn't seem great".



But then they ask you why you borrowed the money... "Oh, he refinanced a debt to pay it off over a longer term because he wanted to pay less per month rather than clear it quickly. Is he really a responsible borrower and someone who's really on top of his borrowings?"



Well, let's look at payment history for this applicant's most recent borrowing. "Oh, it was only a few weeks ago so the first month status just comes up 'unclassified' ; having refinanced his previous £200pm loan to get the cost down, there is no public record of him successfully making even a few months payments at the new lower level of £150pm. Do I really want to lend him hundreds of thousands?"



If the £200pm is not a massive portion of your disposable income (or at least not much bigger proportion than a £100-150 loan would be), I'd just leave it. In *theory* they should be able to notice such "window dressing" and not let you get a much better position by doing it.

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