Does finance like PCP affect mortgage applications?

Trying to juggle car finance and a mortgage? Sort your car finance the right way for the best chance of being approved for a mortgage

John Evans
Aug 10, 2021

Chances are that your house and your car are the most expensive things you'll ever purchase. And if you're like a vast majority of the population, it's likely that you'll have to take out a mortgage for the house and car finance to pay for your wheels.

However, the act of borrowing money for one of these can affect your ability to get a loan for the other. A big mortgage will restrict your ability to borrow a large chunk of money to purchase a car, and vice versa.

Just as banks and building societies will want to be sure you have enough income to cover the cost of the mortgage every month, car finance companies will assess whether you can afford monthly payments on a car - once all your other costs, such as a mortgage are taken into account - before approving you. Keep reading to understand how to give yourself the best chance of being approved for both.

How is a finance application assessed?

Car finance and mortgages may be very different types of loans but they are both connected to you and your income - or, in the case of a joint application, you and your partner. The amount of money lenders are willing to offer you is based upon their assessment of what you can afford to pay back, after all of your other expenses have been taken into account.

When considering your application, finance companies - whether they fund houses or cars - want to be sure there’s enough money left to cover the monthly payments and that you can be relied upon to make them.

That means that if you have a huge salary and only plan to take out a small mortgage and purchase an affordable car, you may have no problem arranging both at the same time - as the finance companies can see that you can comfortably afford payments for both.

If however, you have an average income and want to get a large mortgage and finance a pricey car at the same time, should you get approved for the first one, you're likely to struggle to finance the second, as companies can see that you're stretching your finances and they may deem it unlikely that you'll be able to afford both.

If you already have a large amount of money being taken from your salary each month, that could stop you from getting approved for a second substantial loan. To assess your application, finance companies review you and your financial situation as a whole, using a credit reference agency.

Your personal circumstances (how long you have lived at your current address and whether you have any country court judgements against you), your employment status, your financial history (for example, your repayment record for any past loans) and your current loans and financial commitments, are used by credit reference agencies to calculate your credit rating.

Using this rating, combined with their own internal measures - plus your statement of your current monthly income after tax and all essential expenses have been taken into account - the finance company decides whether or not to lend you the money you're after and at what interest rate.

Why does a car loan affect a mortgage application?

Of all the loans you may consider taking out, a mortgage is likely to be the biggest and certainly the one you’ll have for the longest. It’s a huge financial commitment not only on your part but also on the mortgage company’s part, since it has to wait a very long time to get all of its money back. 

For this reason, mortgage companies are sensitive about you having existing loans - as these affect your ability to pay back new ones - and in particular a large one for a car that may jeopardise your ability to meet mortgage payments. 

Concerning car loans in particular, in recent years the Bank of England has become worried about the huge growth in car finance schemes such as PCP finance. As a result, mortgage companies have become more cautious about lending to people with an existing car loan.

This has made such a difference to some lenders that according to a leading broker, a typical car finance payment of £250 per month could reduce the amount a mortgage company is willing to lend you by up to £35,000. This may be no issue if you opt for a small mortgage and a more afforable car, but is likely to become more problematic as the value of your car finance and mortgage increase compared with your income.

Balance car finance with a mortgage application

This means that it's wise to work out what you can feasibly afford across mortgage and car monthly payments. First, you should establish roughly what your mortgage will cost you and, therefore, how much money you will have left each month, after all other living expenses, to make car payments.

Since lenders are always cautious - to give themselves the best chance of getting their money back and to give some leeway for unexpected circumstances - should your salary drop suddenly or your living costs rise, for instance - it makes sense to be realistic about what surplus you think you will have to fund a car.

One way to give yourself the best chance of being approved for the car you want is to borrow a smaller amount of money, either by saving up for a larger deposit or choosing a cheaper car. While you may not be approved for a brand new car, you may easily get finance for a two- or three-year old equivalent. Or if you can't get finance for a two- or three-year old car, consider looking at four- or five-year old versions instead and your chances of being approved go up.

Bear in mind that a lender is unlikely to lend you more than 25% of your net salary (that's after tax has been deducted), as a ballpark figure of the maximum you're likely to be able to borrow on a car.

When you’re satisfied you’ve found the vehicle you want and, crucially, that you can afford it, apply for the car finance. Doing so before you apply for your mortgage will speed up your application because you should have more proof of address than when you move into a new home and have to wait for bills in your name at the new address and to update your ID. The car can then be delivered to your current address in one seamless process.

A recent change of address may impact your credit rating and delay your application. While your credit file is updated to reflect your new circumstances, it may also result in you not being able to borrow money for a period, which could be a serious problem if you need to replace an unreliable car quickly and you don't have the cash for a new one.

Just be aware that what you spend on the car will affect just how much you can borrow on a mortgage. This may be a problem if you're looking to borrow as much as you can on the mortgage, so it's best to set yourself a budget for your car - bearing in mind your likely mortgage costs - and sticking to it.

How can I check my eligibility for a loan?

To establish your eligibility for a loan and to find out what, roughly, it might cost you, do a so-called ‘soft search’ or 'soft check' using an online finance calculator, making sure to accurately enter your income and expenditure.

Soft searches don't appear on your credit file, meaning they are a good way to get a feel for which finance option offers you the best value, without limiting your ability to take out finance in the future, as you would if you made a succession of formal loan applications.

Can you make multiple finance applications?

While it's possible to make many finance applications, we recommend that you don't make multiple formal applications in your search for a loan. Each will result in a so-called 'hard search' or ‘hard check’ that is recorded on your credit file and which will reduce your credit rating because it looks to a lender as though you are trying to borrow as much money as you can.

If lenders think you're applying for finance left, right and centre this gives the impression that you're desperate for money, making it look like you're going to be less able to pay the finance company back. For the same reason, it's wise not to apply for a car loan and a mortgage at the same time.

Similarly, it's important to be aware when applying for finance - whether that's for a car or a mortgage - of the maximum amount you can borrow. If the bank tells you the maximum mortgage you can get is for £150,000, taking out a £150,000 mortgage is likely to mean you're unable to get credit for the car you want afterwards. It's the same story if you max out what you borrow on the car.

For the best chances of being approved for both, it's worth getting quotes for both a mortgage, presenting what you're likely to be spending on your next car, and a quote for the car showing the likely mortgage monthly payment, to see the maximum amount you're likely to be able to afford. Provided you make sure that only soft checks are carried out, this should give you an indication of how much you can borrow for a mortgage and car finance at the same time, without affecting your ability to get approved for these.

Improve your chances of getting a mortgage

Check your credit history for errors or out-of-date information that may affect it. You can do this for free by contacting the three main credit reference agencies (Experian, Equifax and TransUnion). Approach all three because they may hold different information on you. If you find errors, tell them. If these errors are proven, they have a duty to correct them. Although the impact on your credit score may not be immediate, making sure these details are correct should improve the likelihood you'll be approved for finance.

Next, review your financial situation by checking to see if there are loans you can settle now, and dormant bank and credit card accounts you can close. Do this and the banks will see that your monthly commitments are lower, leaving you more leeway to borrow. Also, it's worth cutting financial ties with your partner - or anyone else you share accounts with - if they have a poor credit record, as their negative score is likely to reduce yours. These ‘housekeeping’ actions should benefit your credit record.

Volkswagen Golf front view

Finally, gather together records of all your financial incomings and outgoings so that when asked about them, you will have all the information you require at your fingertips. Being able to answer these questions promptly and accurately will improve your chances of getting a loan.

Do a little homework and you should get a good feel for what you can borrow, giving you the best chance of being approved first time around and getting the car and house you're after.

 

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