New rules on credit card debt: what do they mean for me?
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Starting a Debt Management Plan (DMP) doesn’t mean the end of your debt worries. However, it does mean you’ve finally got a plan in place to deal with your debt problems and to get your finances back on track.
Now that you’re in control of your money again, your thoughts might turn to the future and you could even be thinking about getting onto the housing ladder. But can you get a mortgage while you’re on a DMP? You might struggle to get a mortgage when you’re on a DMP, but let’s take a look to find out why this is.
Taking on extra credit
A Debt Management Plan (DMP) is an informal debt solution. This means it doesn’t have legally binding rules like a formal debt solution – so there’s not an official rule to say you can’t take out any extra credit.
However, most DMP providers will advise you not to take out credit while you’re on the plan as it will mean you’ll take longer to get debt free. If your mortgage is more expensive than your current rent, it also means you won’t be able to afford to keep up-to-date with your regular DMP payment. In this situation, it’s likely you would need to reduce your DMP payment, which your creditors may not be happy with.
You can change your DMP payment but your existing creditors are very unlikely to accept you taking on a large amount of credit like a mortgage. This may mean they’re more likely to take further legal action against you.
And if you’re already trying to keep on top of your existing unsecured debts, it’s probably not a good idea to add another expense onto this, particularly if it means your living costs will go up. A large amount of new borrowing could see you slipping back into your debt problems again – something you certainly don’t want to happen if you’ve just got on a plan to deal with your debts.
If your rent was very expensive, getting a mortgage might actually mean you’re paying less each month towards living costs. If this is the case, your lenders might be happy for you to go ahead with a mortgage – but it still leaves the problem of whether you’ll be accepted.
So if your Debt Management Plan (DMP) provider doesn’t have a problem with you getting a mortgage, are you likely to get accepted?
You’ll probably struggle to get a mortgage because of the damage to your credit history when you’re on a DMP. This is likely to happen as when you start the solution, your creditors may default your accounts because you’re no longer making your contractual monthly repayments in full. Keep in mind that your creditors can do this at any time if you’re not keeping up with your payments anyway. And if you don’t have any sort of plan for dealing with your debts, it’s likely your finances will end up in a much worse situation.
Defaults will appear on your credit history for at least six years and if you apply for credit during this time, the creditor will be able to see the default on your file. This can mean they’re more likely to turn you down and if they did accept you, it would probably be at a higher rate of interest. You can find out more about how you can get defaults when you’re on a DMP with our blog.
But if you’ve only started a DMP and there’s no damage to your credit history yet, this could mean you won’t find it as difficult to get accepted for a mortgage.
Affording the deposit
If you’re looking to get a mortgage, you’ll usually need to put down a deposit. This is a percentage of the house price and it’s typically at least 10%, although some mortgage lenders may accept a deposit of just 5%. However, these mortgage deals are typically reserved for people with the best credit histories so if you’re on a debt solution, you probably won’t be able to get one of these.
When you’re on a Debt Management Plan (DMP), you’ll pay all of your Disposable Income (DI) towards your debts. This is how much you have left at the end of the month after you’ve paid all of your essential bills and expenses. As your entire DI is going into your DMP every month, it’s unlikely you’ll be able to afford to save up for a deposit.
Weighing up your options
So all in all, you probably won’t be able to get a mortgage while you’re on a Debt Management Plan (DMP). Don’t feel too disheartened by this – just because you have a damaged credit history now, it doesn’t mean it will be this way forever.
As we’ve mentioned, your credit history is affected for at least six years from the time you get a default. So when your DMP is finished, you can start to work towards getting your credit history looking positive again. You can do this by borrowing a small amount and demonstrating to your lenders that you can repay it on time. Find out how you can start to improve your credit history in our blog.
After a while, your credit history will start to improve and you can start to think about applying for a mortgage. But before you do this, you should think carefully about how it will affect you to take on such a large amount of credit. It’s common to feel nervous about borrowing again after you’ve had problems with debt and in some ways, this is a sensible attitude to have.
Speak to a financial advisor before you apply for a mortgage and they’ll be able to tell you about how the extra credit will affect you. Make sure you’ll be able to afford the monthly repayments and that it won’t be too much of a strain on your budget. And if you decide to wait for a couple of years until you’re more in control of your money, don’t worry – your finances will be all the better if you wait until you’re really ready to buy.
by Emily BancroftBack to blog home