How car loans can harm your mortgage offer

HOMEOWNERS who have taken out loans to buy cars are being penalised by lenders when they apply for a mortgage.

Research by Money Mail found that in some cases banks are slashing the amount they will lend by as much as £35,000 for customers who already have a car loan.

More than 6,300 people a day are borrowing to buy a car, sparking fears of a new credit bubble as drivers have taken on £31.9billion of debt in the past year, up 10 per cent on the year before. Now experts are warning that motorists may be signing up to car finance without realising it will damage their chances of getting a mortgage.

Aaron Strutt, of mortgage broker Trinity Financial, said: ‘Most people will have no idea that even a modest car loan can have a huge effect on the size of mortgage you can get. If you’ve got two or three cars on finance it can knock tens of thousands of pounds off the offer the lender will make.

‘And if you’ve got car loans and other debts hanging over your head then you might even be rejected by banks.’ Alistair Hargreaves, of mortgage broker John Charcol, said: ‘Having lots of debt – whether that’s credit cards or car loans – also affects your credit rating and lenders take that into account.

Fears that car loans are being handing out too freely has put the Bank of England and City watchdogs on alert.

The boom is being driven by Personal Contract Purchase (PCP) plans, which now account for more than eight in ten sales where the driver buys on credit.

The buyer pays a cheaper monthly payment than traditional car loans and can choose between paying a lump sum to purchase the vehicle after three to five years or giving it back to the dealer and getting another deal on a new car.

But getting into these types of arrangements is hurting their ability to borrow on a house. A couple with a combined income of £60,000 can borrow up to £300,000 on a mortgage with major high street banks.

But if they were each paying £250 towards a car, their mortgage would fall by as much as £35,000, according to calculations by broker John Charcol.

This is because banks are now required to take into account a borrowers’ monthly outgoings, including debt repayments, when they work out how much to lend.

‘You might even be rejected by banks’