How your car loan can affect your mortgage application

With the rise in more complicated ways to buy a car we look at the different types of finance available and how mortgage lenders consider these types of finance when calculating your maximum borrowing.

Unsecured Personal Loan

Personal loans are available from a bank, building society based on your credit score. Loan terms are generally between 1 and 7 years.

Hire Purchase (HP)

Hire purchase loans are secured against the car. You will need to pay a minimum deposit of 10%, then make monthly payments over an agreed term.

This means you won’t own the car until the last payment has been made.

Personal Contract Purchase (PCP)

This is similar to a HP agreement but you make lower monthly payments.

The loan is based on the difference between the purchase price and the expected value of the car at the end of the agreement. This is based on the annual mileage driven each year.

At the end of the agreement you can:

  • Give back the car to the dealer.
  • Make a final payment, called a balloon payment, to own the car.

Personal Contract Hire (PCH)

You pay the provider a monthly payment to use the car, it usually includes servicing and maintenance. There will be limits on annual millage.

At the end of the agreement, you hand the car back.

How mortgage lenders treat car finance

Mortgage lenders will annualise the monthly payment and deduct the figure from your annual income.

Eg. Annual salary £30,000

Car loan of £300 per month x 12 = £3600 per year.

£30,000 – £3600 = £26,400. This is the figure mortgage lenders will use as your income.

Other than the monthly payment mortgage lenders will also consider the outstanding balance shown on the credit file. For a personal loan this will be the balance of the loan but for PCP and PCH this will be the total purchase price of the car less any payments.

This figure can be much higher than the payment liability and can affect your debt to income ratio negatively. If your outstanding debt is more than your salary you may find the mortgage lender declines your application.

For example, if you took a Hire Purchase agreement for a car that was valued at £30,000 over 3 years with a monthly payment of £250. Your total liability would be £9,000 over the 3 years and you could give the car back at the end. Your credit file would show the full value of the car as a liability.

We have a number of mortgage lenders on our panel that will ignore debt to income ratios. If you are looking for a mortgage and have personal debt’s or car loan’s we may be able to help.

Get in touch


For free impartial advice on financing a car why not visit the money advice service.

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How to get a copy of your credit file

How to compare mortgages

Why do mortgage applications get declined

Remortgaging for debt consolidation