Credit Score Basics > How your credit score affects your mortgage

How your credit score affects your mortgage

Wollit Team3 minute read · Updated 1st July 2024

Your credit score is a crucial factor in determining your eligibility for a mortgage and the terms of your loan in the UK.

Lenders use your credit score to figure out if lending to you is risky and to decide whether to approve your mortgage application.

They also use your credit score to decide on the actual terms of your mortgage and to calculate what interest rate and conditions to offer you.

What is a good credit score for a mortgage in the UK?

There is no single credit score that is considered "good" for a mortgage in the UK, as different lenders have different criteria.

On top of this, you don’t even have a single credit score in the UK, as three different credit reference agencies (Experian, Equifax, and TransUnion) calculate your credit score separately.

However, as a general guide, look at the Experian credit score bands:

Excellent: 961-999 – You could be in line for the best mortgage deals with lower interest rates
Good: 881-960 – You could get most but not all the best mortgage deals.
Fair: 721-880 – You could get good mortgage deals with reasonable interest rates.
Poor: 561-720 – You may get mortgage deals, but with higher interest rates.
Very Poor: 0-560 – You may be declined a mortgage or find it harder to get one without very high interest rates.

You should also remember that your credit score is not the only factor lenders look at. They will also want to know about your income, employment history, deposit amount, value of the property, and your other financial commitments like existing debts and so on.

How does a mortgage application affect my credit score?

When you apply for a mortgage, the lender will run a hard credit search, which can cause a small temporary drop in your credit score. This hard search will be visible on your credit report for around two years.

To soften the impact of hard searches, it's best to avoid making multiple mortgage applications in a short period of time.

If you're unsure about your eligibility, get only a mortgage in principle first, which usually involves only a soft credit check that doesn't affect your score.

This mortgage in principle will save your credit score from too many hard credit checks, and it is also an important document to show sellers that you’ve taken steps towards getting financing and are a serious buyer.

How does a successful mortgage application affect my credit score?

Once your mortgage application is approved and you've taken out the loan, your credit score may take a slight hit, usually around 50 points. This is because a mortgage is a significant debt obligation that is reflected in your credit score.

However, your score should begin to increase again after a few months if you show that you can make the mortgage repayments in time and in full.

It usually takes around five to six months for your score to recover, of course if you also keep up with any other credit commitments you may have.

Can I get a mortgage with a low credit score?

It is possible to get a mortgage with a low credit score, but it may be harder and come with worse terms, like higher interest rates and a lower loan-to-value ratio (LTV).

Interest rates are especially important. Since a mortgage is taken over a very long period, usually 20 to 30 years, even a small difference in yearly rate can make a huge difference over the whole life of the mortgage.

For example, if you get a 30-year mortgage for a house worth £500,000 with a deposit of 20%, here is what a difference of 1% in interest rate can mean:

At an interest rate of 5% (the average rate now in the UK with the big six lenders), your payments will be £773,023, out of which £373,023 will be interest alone.
At a 6% interest rate (which is closer to the average across all lenders), you’ll pay £863,352 over the course of 30 years, and £463,352 out of that will be interest alone. That’s more than £90,000.
And at a 7% interest rate (which is what you can expect for bad credit offers), the difference will be another £95,000.

This is why it’s so important to improve your credit score. 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.

More importantly, a better credit score can help you save a significant amount of money over the course of a long mortgage.