Growing numbers of borrowers have been rejected for a mortgage or seen their loan amount significantly reduced because they have taken out a payday loan.
Buyers and brokers have to be aware of the effect of payday loans on mortgage applications, yet too many have no idea of the danger, according to a new warning from broker John Charcol.
Simon Collins at John Charcol said the Financial Conduct Authority has said payday lenders face tougher regulation, but has failed to alert customers to the impact it will have on a future mortgage application
“You can’t turn on your TV these days without being offered a short-term loan. Their main purpose is to tide you over to payday, often because of a wholly genuine and unexpected bill.
"Despite the astronomical APRs, a staggering number of people are taking them, but there is a danger that lurks within. Mortgage lenders hate payday loans.”
FCA chief executive Martin Wheatley has said it will crackdown on payday lenders when it takes over regulation of consumer credit on 1 April 2014, but Charcol says that its failure to warn customers about the impact on their ability to get a mortgage is a glaring omission.
Collins added: “As far as most mortgage lenders are concerned, if you’ve taken a payday loan, this is irrefutable proof that you are living beyond your means, end of discussion.
"A recent payday loan is a massive negative in the eyes of mortgage underwriters but one that no-one warns borrowers about.
"Obviously, payday loan companies aren’t going to tell you that taking out one of their loans can seriously damage your chances of getting any mortgage, let alone a top mortgage rate, and lenders are strangely hesitant about warning would-be borrowers of the perils of the payday loan.”
The FCA is looking to introduce mandatory affordability checks, restrict continuous payment authorities and limit the number of loan roll-overs to two. It also wants tighter restrictions on what payday lenders can say in adverts and will ban any that are misleading.
Collins said: "But where is the unambiguous warning message of the potential damage taking a payday loan will do to your chances of getting a mortgage, particularly at the higher loan to values, including Help to Buy 1 & 2?
“A recent payday loan on your credit history doesn’t mean that you can’t get a mortgage but it almost certainly rules out most of the major high street lenders.
"And even if a mortgage offer can be agreed, the rate is unlikely to be particularly competitive.
“There’s plenty of regulation in the UK, along with an abundance of wordy small print, but no-one to really explain the consequences of how things like payday loans can affect you, and your financial position.
"Even the new chairperson of the Financial Services Consumer Panel thinks they’re perfectly OK in certain circumstances, and that using one to pay for a night out is exactly the same as putting the cost on a credit card! So it’s buyer beware, because no one else will warn them.”
Clients who have taken a payday loan need to see a copy of their credit file, to find out what the lender will see. "Although many of the leading mortgage rates are from lenders who have zero or very little tolerance of payday loans, some will take a more pragmatic view," Collins said.
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