How payday loans can scupper your chances of a mortgage

Mortgage lender GE Money Home Lending has revealed it will reject applicants who have used payday loans in the past three months.

Anyone who has had two or more such loans in the past year would also be refused. Even if you paid off the loan promptly, it still won’t help your case.

Other lenders are likely to be wary of this type of borrowing on your record too, so if you’re in the market for a new home you will need to tidy up your finances.

What are payday loans?

Payday loan companies offer expensive short-term loans. Often they advertise on daytime TV and market themselves to people who need tiding over until the next paycheck.

Interest rates are high, but the loans are only meant to be taken out for a few weeks to a couple of months. Wonga.com charges a little over £34 for a £100 loan borrowed over 28 days, while a £500 loan with Payday UK for one month comes in at £645. This equals interest of 29%, but an annual percentage rate of 1,737%.

[SPOTLIGHT]There are other, cheaper ways to borrow and you can find more tips in say no to Mr Superloan - the better ways to borrow. You can also use our comparison tools to find a low-cost loan and compare the best mortgage deals.

Why are lenders vigilant about payday loans?

If you use payday loans regularly, it might imply that you’re not able to make your money stretch from one month to the next. If that’s the case, banks and building societies would be understandably nervous about your ability to commit to mortgage repayments.

At the start of the year housing charity Shelter revealed that millions of homeowners were using payday loans as a crutch to pay mortgages and bills. On top of this, the Office of Fair Trading is also investigating the industry – read about this in OFT launches review into payday lending.

With so many people struggling to make ends meet, lenders don’t want to be seen to be recklessly handing out mortgages to people who wouldn’t be able to afford the repayments.

What do other lenders say?

GE Money Home Lending, which offers deals via brokers to people with poor credit histories, is the only lender to specifically exclude payday loan customers. But that’s not to say other lenders wouldn’t come to the same conclusion based on the same set of circumstances.

The major mortgage providers all seem to be singing from the same hymn sheet - they don’t specifically reject payday loan customers, but loans are taken into account when applications are reviewed.

HSBC says a loan might indicate that a borrower is in a ‘stressed position’ with their finances.

Nationwide Building Society says in some circumstances it will ‘manually review’ any areas of the application that cause concern – such as a high-interest, short-term loan – and make decisions on a case by case basis.

Meanwhile Barclays says it will deduct any outstanding payday loan debt from an applicant’s monthly disposable income before calculating whether or not you can afford a mortgage.

More on mortgages:

The true cost of a month's mortgage payment holiday

Why fixed rates are always in fashion

Is now the time to grab a tracker mortgage?