Problem debt: will I ever be able to get a mortgage?

If you need to take out an IVA, a Debt Relief Order or go bankrupt, what damage will it do to your chances of getting a mortgage in the future?

In our day jobs, when we’re not writing for Lovemoney, we give advice to people who are suffering with debt problems. We talk through their situation and put together an accurate income and expenditure budget.

Aafter we’ve done this, we look at what debt solutions are available. It could be a Debt Management Plan , an Individual Voluntary Arrangement (IVA), a Debt Relief Order or in some cases personal bankruptcy.

All the solutions we recommend offer a way to resolve problem debt and offer the chance for you to get control of your financial future.

We do however get lots of clients asking us whether, after taking on one of these solutions, they’ll be able to get a mortgage in the future.

Future mortgages

We’re not financial advisors, we’re debt advisors. So while we do have knowledge of credit ratings and how they work, this isn’t our main area of expertise. We exist to help sort out debt problems in the here and now and we certainly don’t have a crystal ball to see what a person’s debt free future holds.

We can offer these facts though:

• A debt management plan will have an adverse effect on your credit rating.
• Debt relief orders, IVAs and bankruptcy are all forms of insolvency. Having insolvency on your credit file is about as serious as it can get in the eyes of a potential mortgage company.

All of these will remain on your credit file last for six years. So even personal bankruptcy will, in half a dozen years, leave your credit file. This doesn’t automatically mean that you’ll be creditworthy again, but it does mean that you can start to rebuild your rating.

It’s also worth noting that your credit file isn’t the only thing that determines whether you get a mortgage or not. Factors such as your earnings and the size of the deposit required are obviously taken into consideration.

Lenders' attitudes

It’s true that some mortgage applications will ask directly if you’ve ever been bankrupt or entered an arrangement with your creditors. This means that while it may no longer show on your credit rating, lenders still want to know if you’ve ever been insolvent (and telling fibs on a mortgage application would be very unwise).

Prior to the credit crunch mortgage products where readily available for those who had been in IVAs or been bankrupt previously. Of course the change of financial climate over the past few years has led to many of these mortgage products being discontinued.

What if I already have a mortgage and I’m in debt?

The situation’s slightly different if you’re already a homeowner with a mortgage and you find yourself in financial difficulties. Firstly, your mortgage payments are always treated as a priority debt. After all, the most important thing is to keep a roof over your head.

If you’re a mortgage holder and you do enter a debt solution like a debt management plan or an IVA, your credit rating will still be affected and may restrict mortgage products available to you in the future.

Many other people get confused about fixed mortgage deals, often believing that when a deal ends they’ll have to repay the whole mortgage. In most cases clients on a DMP or IVA whose fixed rate comes to an end will find themselves on the mortgage provider’s standard variable rate for the remaining mortgage term.

There’s often no need to look for new mortgage deals while you’re in a debt solution, especially as at the present time many lenders' standard variable rates are cheaper than any fixed options available. However, you need to be vigilant and should consider taking advice from an independent mortgage specialist.

Our advice…

Whether you’re a mortgage holder or want a mortgage in the future, if you’ve got problem debt you need to deal with it. The best advice in this situation is to get help sooner rather than later. The quicker you take action, the quicker you’ll be able to start to repair your credit rating (even if it’s six years down the line).

If you’re worried about problem debt, and you’re worried about the effect this’ll have on you in the future, the first place to start is our online debt advice tool Debt Remedy.

More on debt:

Where to get free debt advice

What to do if your children are in debt

Demand for debt help rockets

Self-employed suffering with double the debt of employed

Debt schemes that prey on those in need of help

What to do if your children are in debt