Credit Score Basics > Does using an arranged overdraft affect mortgage applications?

Does using an arranged overdraft affect mortgage applications?

Wollit Team2 minute read · Updated 30th June 2024

Going into an arranged overdraft does not necessarily prevent you from getting a mortgage. However, how you manage your overdraft can affect your mortgage application.

How overdrafts affect your credit score

Having an arranged overdraft can actually improve your credit score if you manage it responsibly. This is because lenders like to see that you have access to credit that you aren't using, which shows that you have some control over your spending, not to mention some “financial backup.”

It’s only the unarranged overdrafts that can hurt your credit score.

What’s the difference between arranged and unarranged overdrafts?

An arranged overdraft is a pre-approved line of credit, one already agreed by your bank – hence the name.

In contrast, unarranged overdrafts are the ones where you borrow without permission. Because of this, they are viewed not that favourably by credit reference agencies (Experian, Equifax, and TransUnion) and lenders, which is why they can hurt your credit score.

How can I make sure that my overdraft use won’t affect my mortgage application?

To keep your use of overdraft from affecting your mortgage application, you need to learn how to manage the overdraft responsibly.

Here is what this means:

Use the overdraft only occasionally. This shows lenders that you’re not too reliant on debt.
Pay the overdraft off regularly. This prevents you from having missed payments, which can hurt your credit score.
Keep your overdraft balance low compared to your limit – this can help your credit score.
Clear your overdraft before applying for a mortgage to show that you’re financially stable.
Avoid unarranged overdrafts entirely, as these can come with higher fees and always hurt your credit score.

What do mortgage lenders think of the overdraft in my credit file?

Overdraft is usually a smaller line of credit and one that’s not used frequently by most people. As such, lenders don’t pay as much attention to it as they do to other lines of credit, like credit cards or personal loans.

When it comes to overdrafts, this is what mortgage lenders usually care about:

How often you use your overdraft: this can indicate how well you manage money.
The size of your overdraft limit and how much you use from it regularly.
And any recent overdraft activity. Recent increases in your overdraft balance or unauthorised overdrafts can make lenders concerned about your financial stability.

In other words, while having an overdraft does not automatically disqualify you from a mortgage, it can affect your application. This is especially true if you have a history of relying heavily on overdrafts or regularly going over the limit. In these situations, lenders may view you as a higher-risk candidate.

However, lenders will look at more than just your overdraft usage to figure out your affordability and risk. At the end of the day, what will matter most will be your actual credit score and credit history.

Luckily, now there are many apps that can help you build and improve credit.

One such app is Wollit. Wollit is an app available both on Android and iOS, and it works by reporting a fixed-fee monthly subscription as a loan repayment to all three credit reference agencies. This helps you build your credit history and directly influences your credit score.

On top of this, Wollit can also report your monthly rent payment to Experian. This can add another line in your credit report that shows lenders that you’re reliable and pay your bills on time, helping you make the most of your rent while you prepare to become a homeowner.