More and more people have come to rely on loans to finance their investments. It is therefore not unusual to find someone that already has van financing seeking a mortgage facility. But does already having van finance affect your ability to secure a mortgage? The answer is yes.
Already having van finance will affect your ability to repay another loan facility. And, how well you are repaying the debt you already have will indicate to the second lender how responsible you are likely to be with another loan. Your repayment record will impact your credit score and thus influence what kind of rate you will get on your mortgage and in some instances if the mortgage will even be approved by the lender.
This effect applies also where you might already have taken a mortgage first and want to later access van finance deals. Let us first look at how and why one debt can affect the other.
How does van finance affect your mortgage?
If you initially took up van financing, then you already have a debt you are repaying. This means that there is an amount of your income that is already dedicated to repaying the van finance. When you seek to apply for a mortgage, the lender will need to factor in this repayment you are already committed to when assessing your mortgage affordability.
Van finance can be expensive and therefore make for a sizable regular payment that is deducted from your income. Mortgage lenders, therefore, have to account for this deduction and your other normal expenses to figure out what amount you can repay as a mortgage payment.
They then also have to review your credit score. Good repayment on your van finance can mean a better interest rate on your mortgage. It also gives the lender confidence that you are a responsible borrower that will make mortgage payments in full and on time. Having a history of missed van finance payments will however lead to a poor credit score and may discourage the lender from approving your mortgage application as it indicates you may behave the same way with the new facility.
Does van finance mean I cannot get a mortgage?
No. A borrower can secure both van financing and a mortgage. It comes down to whether your financial position will allow you to afford both debt facilities and your repayment behaviour.
Already having van finance can limit your ability to secure a mortgage if the repayment amount is high relative to the income you earn. This means that what you have left over after repaying the van loan and meeting your usual expense may be too little to cover the size of mortgage you want.
Also, if you have a history of bad repayment on your van finance that causes you to also have a poor credit score, then the lender will likely offer a high-interest rate that further reduces the mortgage amount you can borrow.
How will the lender assess mortgage affordability?
Mortgage lenders will typically request that you provide bank statements for at least the last three months alongside your application. Upon review of these statements, they will be able to establish how much you are paying for your van finance, your usual living expenses and any other regular spending.
A key goal of this assessment is to determine your debt-to-income ratio. This means the amount of income that is committed to repayment of regular debts. Besides van financing, they will also look at other debt repayments like credit card repayments and personal loans. The higher this debt ratio is, the riskier a borrower you appear and the less inclined lenders will be to approve new credit.
With this assessment, the mortgage lender will then be able to establish how much of your income you need to cover your debts and other regular obligations, and what amount is left over that can go toward mortgage repayment. Depending on the interest rate you qualify for and the period of the mortgage, the lender can then calculate what size of mortgage facility you qualify for.
How does my van finance affect my credit score?
If you already have van financing, your mortgage lender will want to determine how well you have been repaying this debt. Full and timely payments are most desirable. If you have repeated incidents of late or missed payments, they will appear on your credit file. This repayment performance will also be reflected in your credit score.
As part of the mortgage assessment, your lender will perform a hard credit check. When such a check is carried out, it reflects in the report. So, it is not advisable to have many lenders perform such checks within a short period. If you want to apply to multiple lenders, you should spread out your applications so these checks are not clustered.
To help improve your credit score and what information your lender will glean from your credit file, you should try to:
- Ensure full and timely debt repayment
- Minimise the amount of outstanding debts
- Pay off debts as soon as possible
- Limit the number of hard credit checks that will appear on your credit file
Can I apply for van finance and a mortgage simultaneously?
Yes. You can apply for both debt financing at once, but this is not advisable. Lenders may be reluctant to grant you major financing when you have yet to prove how responsible a borrower you can be.
It is better to apply for one type of financing and make repayments for a while before considering adding another. This will also give you a chance to build up your credit score and get comfortable with how having such major debt will impact your finances.
If you start with van finance which is meant to boost your business, any increased income can help in improving the chances your mortgage application will be approved and at a higher amount. Remember the mortgage amount you may be granted will primarily be pegged on your level of income relative to the debts you are paying. The higher the income, the better your chances with a mortgage.
How can I improve my financial profile when borrowing van finance?
Taking up van finance can be a great investment, especially as it is mainly done to grow business and hopefully result in boosted incomes. However, you need to plan carefully, especially if you intend to take up a mortgage before you have paid off the van finance. Here are some tips on how to protect your financial profile and improve the chances that taking up this second debt will remain feasible.
- Be practical – when choosing what vehicle to purchase, ensure that it is something you can comfortably afford and that will add value to your business. Even if your finances at the time may allow you to splurge on something more expensive, try to keep this debt to a reasonable level that will allow you to also comfortably afford mortgage payments later on.
- Choose the right finance product – there are several options when it comes to van finance. Be sure to carefully evaluate each one, particularly when it comes to the attached interest rate and other fees. Ensure the repayment arrangement is the best option for your circumstances.
- Pay on time – ensure that once you take any form of debt, you make repayments on time and in full, every time. It is important in protecting and building your credit score. The more reliable a borrower you prove yourself to be, the more other lenders will be willing to give subsequent loans.
- Pay off your debt as early as possible – the sooner you can clear debts, even before the agreed-upon repayment period, the faster your debt to income ratio will be improved. The less outstanding debt you have, the more income you will have left over to make mortgage payments. This, in turn, may qualify you for a higher mortgage amount.
- Delay your mortgage application – if your debt to income ratio is high and the mortgage amount you qualify for is less than what you want, consider delaying your mortgage application. Wait until you have paid off your van finance and then you will have more income you can devote to mortgage repayments.
- Consult with a mortgage broker – it can be helpful to consult with an industry professional. A mortgage broker can help you determine what your chances are if you make a mortgage application. They can advise on what amount you can qualify for and the interest rates. They can also tell you if it is advisable to wait and for how long.