Whenever you apply for any kind of loan or credit, the lender is duty-bound to check your credit rating. This is done through a simple request to one of the UK’s main credit reference agencies such as Experian or Equifax. The enquiry is made so that the lender has some idea of the way in which you have managed your debts in the past and whether you have made the agreed repayments when they fall due.
An overdraft takes the form of a credit on your current account – it amounts to a withdrawal of money from your account even when there is none there. That overdraft might have been approved in advance by your bank, so it is “authorised”; or you have overdrawn your account without the bank’s permission – when it is then “unauthorised” or “unarranged”.
So, if you want to make an unarranged overdraft mortgage application, what do you need to know?
How can unarranged overdrafts affect your credit file?
Because it represents credit, an overdraft appears on your credit report. If the overdraft is authorised, then its appearance on your credit report typically may have little effect. (Unless you are constantly in a large, authorised overdraft. Any prospective lender may wonder why it hasn’t been paid back).
If it is an unauthorised overdraft, that fact can adversely affect your credit score – because it suggests a lack of control over your finances and your failure to clear with your bank in advance any need to overdraw your account. This is likely to make it harder for you to get a loan or any other type of credit in the future.
These considerations loom larger than ever, of course, if the credit for which you are applying is as substantial as a mortgage. The bigger the amount, the greater the risks to the lender – and the more weight is attached to the evaluation of your credit rating and the way you’ve managed past debts – including both authorised and unauthorised overdrafts.
The fear will be that you may be forced to default on your mortgage repayments because of the overspending that necessitated your unauthorised overdraft.
While it is possible to secure a mortgage with an unarranged overdraft on your credit report, your chances of success are diminished, and you will be choosing from a more limited pool of potential lenders. Advice and guidance from an experienced mortgage broker might well be needed.
Post Topics – Unarranged overdraft mortgage application
How can unarranged overdrafts affect your credit file?
Does having an overdraft affect getting a mortgage?
Can I get a mortgage with an unauthorised overdraft?
Does having an overdraft affect getting a mortgage?
We have explained how having an overdraft can affect your credit rating and, therefore, your ability to secure credit or a loan – including a loan as big as most mortgages.
But the simple reality is that overdrafts and even unarranged or unauthorised overdrafts are used by many people. A story in the Times newspaper dated the 1st of March 2022, for example , revealed estimates from the Financial Conduct Authority (FCA) that 14 million people in the UK resort to an unauthorised overdraft each year – and that one in ten economically active individuals are permanently overdrawn.
Against this background, therefore, some mortgage lenders may be more relaxed than others about unarranged overdraft mortgage applications. Everything will depend on the type of overdraft you have:
- as already noted, an unauthorised overdraft is likely to cause more problems than an authorised overdraft – and the frequency with which you rely on any such overdraft will prove critical (isolated incidents will be easier for the lender to overlook);
- if you use any overdraft responsibly – making repayments in good time and paying off the banking charges you will have incurred – this may improve your chances of success;
- if it appears that you are relying on your overdraft on a regular basis, this might suggest that you are already overspending and living beyond your means – mortgage lenders will be wary in the extreme of advancing still further credit;
- the size of any overdraft might also give some potential lenders cause for concern – but, once again, if you are managing the credit responsibly and paying the fees and charges as they fall due, this will count in your favour.
While an overdraft in itself is unlikely to rule out getting a mortgage, it may make the process more challenging.
Can I get a mortgage with an unauthorised overdraft?
Do not rule out the prospect of securing a mortgage if you have an overdraft.
Bear in mind, though, that any potential lender will consider several factors and that you stand a greater chance of success if your overdraft was authorised rather than having to apply for a mortgage with an unarranged overdraft.
How to prepare for a mortgage if you have an overdraft
If the time is approaching when you are likely to want to make an application for a mortgage, pay particular attention to your budget and the management of your financial commitments – especially any outstanding loans and credit score.
Ideally, this will involve reducing any overdrafts during the lead into your mortgage application and until the process is complete. Certainly, you will want to remain within any overdraft limits already set by your bank. Controlling your affairs in this way will help demonstrate to any potential mortgage lender that you can handle your debts in a responsible fashion.
In particular:
- the critical period will be the last three months of bank statementsA record of a borrower's financial transactions often requir... More – your lender may typically ask to see them – so make sure everything is in order at this time;
- maintain a positive balance on your account so that you do not increase the size of any overdraft;
- if you do overdraw the account, be certain to keep up with ongoing commitments such as direct debits and standing order payments;
- make sure, too, to pay any bank charges including your overdraft fees – if you fail to do so, you might incur still more fees by default and that would leave an adverse report on your credit score references, making it even more difficult to secure a mortgage; and
- your mortgage application will rely on as clean and healthy a credit record as possible – so, you must avoid any unsettled debts that could result in a county court judgement (CCJ) against you.
Next steps
An unarranged overdraft mortgage application may prove more of a challenge than others – but your chances of success can be substantially improved if you find the most suitable lender.
Making that choice can be important in the longer term since any rejected application is likely to adversely affect your credit rating – and make subsequent applications for loans, credit, or a mortgage more challenging still.
To help in your search for the appropriate lender and throughout the application process, therefore, you might want to draw on the expertise and experience of professionals such as us here at NeedingAdvice.co.uk.
FAQs – Unarranged Overdraft Mortgage
What is an overdraft limit?
The amount of money you can borrow from your bank without prior approval. The maximum amount you can borrow depends on your current account type and whether you are using an arranged or unarranged overdraft facility.
You should always check what your overdraft limit is before applying for a loan or mortgage. If you exceed your overdraft limit, your bank may charge you interest on all the money you owe. This means that you could end up paying more than the original loan amount.
You cannot use an overdraft facility to cover a debt that has been written off or discharged.
Does an overdraft limit affect mortgage applications?
Yes, it does. If you have an unarranged overdrawn loan then you cannot get a mortgage unless you have enough money available to cover all the costs associated with buying a property. This includes paying off existing loans and closing costs. The amount of money required to close a mortgage varies depending on how much equityThe difference between the value of the property and the amo... More you have in the property, the value of the house and other factors.
If you have an arranged overdrawn loan then you need to ensure that you don’t go over your agreed overdraft limit when you apply for a mortgage. It’s always better to contact an experienced mortgage adviser before starting your application.
Does having an unarranged overdraft affect a mortgage application?
Yes, an unarranged overdraft could also affect your mortgage application from many Mainstreet banks and building societies. If you are affected by overdraft charges, you can contact a market mortgage broker, who can help you with your mortgage application process.
How does an overdraft affect your credit score?
Having an unarranged overdraw facility can negatively impact your credit score because lenders look at the number of times you’ve run into trouble with your finances. They’ll take this into consideration when deciding whether to offer you a home loan.
However, if you’re looking to buy a new car, hire a van or even start a business, you may not be able to access finance until your credit score improves. So, try to pay back any outstanding debts quickly and avoid falling behind with repayments.
What’s the difference between an authorised and unauthorised overdraft?
Authorised overdrafts are ones that you apply for and get approval from your bank. Unauthorised overdrafts are those that your bank lets you use without asking you first. Both types of overdrafts are very expensive. Overdrafts can negatively impact your credit score.
Overdrafts are usually charged at a higher rate of interest than standard savings accounts. You will also probably have to pay fees to use them.
Some people think they can save money by borrowing from their bank instead of taking out a personal loanA personal loan is an unsecured loan borrowed from a bank, b.... However, most banks won’t lend you money unless you have a good track record of repaying your debts.
The best way to manage your finances is to keep them under control. It’s important to budget your spending carefully so that you don’t fall into financial difficulties.
Will I be turned down for a mortgage because of my overdraft in the UK?
It depends on which lender you approach. Some lenders will let you borrow against an unarranged overdraft loan, while others won’t.
If you do find yourself unable to get a mortgage, there are still ways to secure financing. For example, you might consider a secured loan where you put up something as collateral (such as a car) to guarantee the loan. Alternatively, you could ask friends or family members to co-sign your loan as Mortgage Guarantor.
Will an unused overdraft affect my mortgage application?
A rarely or never used overdraft facility won’t impact your mortgage eligibility loan application. However, if you have an unarranged overdrawn loan, it could affect your chances of getting a mortgage. You should always check with your lender before applying for a mortgage. Your lender may require you to show proof of regular income and a stable source of funds.
Does the use of overdraft in the bank statement, could impact the mortgage application process?
Yes, the use of an unarranged overdrafted account may affect your ability to obtain a mortgage. This is because some lenders will only allow applicants to have one overdraft facility per bank statement.
This means that if you already have two or more unarranged overdraft facilities, you may need to close one of them to ensure that you meet their requirements. If you want to apply for an unarranged overdraft mortgage in the UK, you can contact a mortgage advisor.
What are the disadvantages of overdrafts?
There are many disadvantages associated with using an unarranged overdraw facility. These include:
You’ll likely incur additional charges when using an unarranged overdraft facility.
Your bank balance may fluctuate due to unexpected expenses.
You may not receive any notification about your account being overdrawn.
You may not be able to access your money until the next day.
If you’re planning to take out an unarranged overdraught facility, it’s advisable to set up direct debits to cover your bills.
FAQs
How do overdrafts affect your credit score in the UK?
In the UK, how you handle your overdraft can influence your credit score. An arranged overdraft, when used responsibly, generally doesn’t harm your credit score. However, frequently entering into an unarranged overdraft can negatively affect your score, signalling to lenders that you may struggle with managing your finances.
Does applying for, increasing, decreasing, or going into an overdraft (arranged or unarranged) impact your credit score?
Applying for and modifying your overdraft limit can impact your credit score, as these actions often prompt a credit checkA check of a borrower's credit history, which is used by mor... More. Regularly using an unarranged overdraft can negatively affect your credit score, while a well-managed overdraft may not have a significant impact.
Can using an overdraft improve your credit rating, and does it appear on your credit report?
Using an arranged overdraft responsibly can demonstrate to lenders that you’re capable of managing credit effectively, potentially improving your credit rating. Yes, your overdraft usage and the limit are typically reported to credit bureaus and appear on your credit report.
Overdrafts and Mortgages:
How do overdrafts influence mortgage applications, and is it possible to secure a mortgage if you have an overdraft?
Overdrafts can influence mortgage applications, depending on how they’re managed. Having an arranged overdraft is not necessarily a problem; it’s more about how you use it. Responsible management of an overdraft can demonstrate financial savviness. It is indeed possible to secure a mortgage with an overdraft, provided you show sensible financial behaviour.
What impact does the size and frequency of overdraft use have on mortgage approval chances?
The size and frequency of overdraft use can significantly impact your mortgage approval chances. High, frequent usage can be seen as financial mismanagement, reducing your chances. Minimal, infrequent use, on the other hand, is less likely to negatively affect your application.
How are overdrafts viewed by mortgage lenders, and what steps should you take if an overdraft leads to a mortgage application being declined?
Mortgage lenders view overdrafts as part of your overall financial health. Excessive unarranged overdrafts can be a red flag. If your application is declined due to overdraft usage, work on improving your financial habits, clear any outstanding overdrafts, and consult with a mortgage broker for tailored advice.
Is using an overdraft for a mortgage deposit feasible, and what do lenders look for in bank statements regarding overdraft usage?
Using an overdraft for a mortgage deposit is generally not advisable, as lenders prefer to see savings accumulated over time. Lenders will scrutinize bank statements for responsible financial behaviour, including how overdrafts are managed, seeking evidence of stability and prudent financial management.
General Overdraft Information:
What is an overdraft and how does it function?
An overdraft is a credit facility provided by a bank that allows you to spend more money than you have in your account up to an agreed limit. It can be arranged (agreed in advance) or unarranged (not agreed in advance), and it functions as a short-term borrowing solution.
What distinguishes an authorised overdraft from an unauthorised one?
An authorised (or arranged) overdraft is one that your bank has agreed to, providing a specific limit. An unauthorised (or unarranged) overdraft occurs when you exceed your account balance or authorised overdraft limit without prior agreement.
Is regularly using your overdraft, including student overdrafts, advisable?
Regularly using an overdraft can indicate financial stress and may not be advisable in the long term, especially if it’s unarranged. For students, a carefully managed arranged overdraft can be a helpful financial tool, but it’s important to avoid becoming overly reliant on it.
Should an overdraft or a credit card be paid off first?
The decision to pay off an overdraft or a credit card first depends on the interest rates and terms. Generally, it’s wise to pay off the debt with the highest interest rate first. For many, this means prioritising credit card debt, but consider your personal circumstances and the costs associated with each.
What is the Snowball Method for managing credit?
The Snowball Method is a debt repayment strategy where you pay off debts in order of smallest to largest, gaining momentum as each balance is paid off. While not always the most cost-efficient method, it can provide psychological wins that motivate further debt repayment.
Advice and Support:
In what ways can a broker assist with overdraft issues and mortgage applications?
A broker can provide valuable advice on managing overdrafts to improve your mortgage application’s success. They offer tailored strategies for demonstrating financial responsibility to lenders and can help navigate the application process more effectively.
What actions should you take if your mortgage application is declined due to an overdraft, and what should be avoided?
If your application is declined due to an overdraft, focus on rectifying your financial habits, perhaps by clearing the overdraft and demonstrating a pattern of savings. Avoid making multiple credit applications in a short period, as this can further impact your credit score. Consulting with a broker can also provide guidance on the next best steps.
How Lenders Actually Read an Overdraft on Your Bank Statements
Being in your overdraft does not automatically stop a mortgage application, but it does change what the underwriter is looking for. Lenders request three months of bank statements as standard, and the pattern across those three months carries far more weight than the balance on any single day. Understanding what that pattern signals is the difference between an easy case and an avoidable decline.
Arranged and unarranged overdrafts are treated very differently
An arranged overdraft used occasionally and cleared each month is generally read as normal cash-flow management. It is a facility the bank agreed to in advance, and most lenders will simply note it. An unarranged overdraft is a different signal entirely, because it means spending went beyond the agreed limit. Underwriters treat repeated unarranged usage as evidence that the household budget does not currently balance, which speaks directly to affordability. A single unarranged item caused by a mistimed direct debit is usually explainable; a recurring pattern is much harder to argue away.
The three-month window is the one that counts
Because most lenders look at the three months immediately before the application, the practical implication is straightforward: the timing of when you apply matters as much as your overall financial position. If your recent statements show unarranged usage, waiting until you have three clean months before submitting will usually produce a materially better outcome than applying now and hoping it is overlooked. Statements are read line by line by a human underwriter on most non-automated cases.
Being permanently in your overdraft is the bigger issue
A borrower who never comes out of the overdraft — where the salary lands, clears part of it, and the balance drifts back down before the next payday — presents differently from one who dips in and out. In the first case the overdraft is effectively functioning as long-term borrowing, and many lenders will treat the outstanding balance as a committed debt when calculating affordability, reducing the amount available to borrow. Clearing the facility and keeping the account in credit for a few months before applying addresses both concerns at once.
What to do before you apply
Order your statements and read them the way an underwriter would: look for unarranged charges, gambling transactions, returned direct debits, and whether the account ever sits in credit. If any of those appear, they are worth discussing with an adviser before an application is submitted, because a declined application leaves a hard credit search on your file that other lenders can see. As an independent, FCA-regulated brokerage we can review your statements first and approach lenders whose criteria fit your situation, with no obligation. You can read more about our advisers on the meet our team page.