Question
I hope to buy my first home and have saved up a 5% deposit. I earn £35,000 a year but I’m still paying off my student loan and sometimes use an overdraft at the end of the month.
Could this reduce the amount I can borrow or prevent me from getting a 95% mortgage?
Darren’s answer
In short, you can get a mortgage with a 5% deposit and a student loan. Your student loan will factor into your affordability check that lenders will complete when assessing how much you can borrow.
Lenders will calculate how much you can borrow using several factors, including:
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- Your income
- Expenses including credit obligations/student loans
- Credit score
A student loan alone is unlikely to prevent you from getting a 95% mortgage. Lenders handle this differently than a personal loan or credit card, and are generally more interested in your monthly payment than the balance you owe.
Sometimes going into overdrafts isn’t necessarily a problem, but lenders will review the bank’s recent statements and may become concerned if:
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- You are overdrawn regularly every month
- You are close to your overdraft limit
- Your account remains overdrawn when you are paid
- Your spending indicates financial stress
Using an overdraft occasionally is very different from relying on it every month to cover basic expenses.
There are many lenders who offer 95% loan-to-value (LTV) mortgages, meaning a 5% deposit could be enough for a first-time buyer, provided your income, credit history and affordability meet their criteria.
As a very rough guide, many lenders will consider about four to 4.5 times income, taking into account affordability checks.
If you’re planning to apply soon, I suggest you continue to build up the deposit and try to reduce your reliance on overdrafts over the next few months. Also try to avoid taking out new credit before applying.
It’s a good idea to speak with a broker who can complete a Decision In Principle (DIP) to check how much you can borrow.
