John Charcol: beware effect of pay day loans on mortgage applications
John Charcol warns buyers to beware of the effect of pay day loans on a mortgage application.
As the ranks of potential home buyers continue to swell, thanks to more confidence in the market and the popularity of Help To Buy 1&2, there’s been a noticeable increase in the number of would-be borrowers being either declined for a loan or finding the amount offered being significantly reduced as a result of having taken out a payday loan.
Simon Collins, of leading independent mortgage adviser John Charcol, comments:
“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, having looked at the proposals John Charcol says that a lack of any warning about the impact on the future potential to obtain a mortgage is a glaring omission.
“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, Wonga and the other 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.”
So what is the regulator looking to introduce? Well there’s mandatory affordability checks, a restriction on continuous payment authorities, and limiting the number of loan roll-overs to two. They also want tighter restrictions on what payday lenders can say in adverts and will ban any that are misleading. All points of which are worthy of attention, but where is the unambiguous warning message of the potential damage taking a payday loan will do to your chances of getting a mortgage, particularly at the higher loan to values, including ‘Help to Buy 1 & 2’?
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.”
Courtesy of Financial Reporter