Clearing debts can be difficult, which is when you may find yourself resorting to a debt management plan.
These plans are meant to make your debt significantly more manageable to ensure that the amount you owe is paid back in a timely manner. But the trouble is – a debt management plan can affect your mortgage choices as well.
An active or resolved plan may reduce the number of lenders willing to approve a mortgage application. As a result, many borrowers assume that a mortgage with debt management plan is not possible.
In truth, while debt management plans do make receiving mortgages rather difficult, it is not impossible. Whether active or resolved, let’s find out what goes into getting a mortgage with debt management plan.
Table of Contents
- What is Debt Management Plan?
- Can I Get a Mortgage With Debt Management Plan?
- The Required Deposit
- Credit Score And Debt Management Plan Mortgage
- DMP And Borrowing Limits
- Getting A Mortgage After Settling A DMP
- Remortgaging With A DMP
- Final Word
What is Debt Management Plan?
A debt management plan (DMP) is an arrangement made between the debtor and their creditors pertaining to the money that iis owed. These debts are in all most all cases unsecured debts like credit or store cards, personal loans, overdrafts etc.
To opt into a debt management plan, the debtor must get in touch with a DMP provider to create an affordable payment plan. Simultaneously, the provider will contact the creditors to discuss the details of the plan.
These plans typically have the debtor repay the owed amount in monthly instalments, which they pay to the DMP provider. The provider then pays the creditor on the debtor’s behalf while subtracting their fee from the amount.
Legality aside, the primary way a DMP differs from an IVA (Individual Voluntary Agreement) is that the debt interest is not usually legally stipulated like an IVA.
DMPs can have the debtor pay smaller amounts per instalment so the repayment duration lasts for a longer time.
Once again It’s worth noting that DMPs are not legally binding, which means that the debtor can cancel the plan at their discretion.
Can I Get a Mortgage With Debt Management Plan?
A large part of getting a mortgage with an active or resolved DMP hinges on the recency of the plan.
Many lenders outright refuse to entertain mortgage applicants who had an active DMP up to six years prior to the date of application.
As such, if you find yourself in such a position, consider approaching a specialist lender and an advisor who has unrestricted access to the market. It’s best to approach those with experience in dealing with debt management plans to find the best deals.
It could be argued that you should try to avoid approaching lenders on your own, as it could have a negative impact on your credit file and will be a difficult process if done incorrectly.
After all, the importance of keeping your credit report as spotless as possible in the aftermath of a DMP cannot be understated.
The Required Deposit
Typically, those with a poor credit score lose access to high loan-to-value (LTV) ratio mortgages. Meaning that such people must pay a higher sum as a deposit than what is typically offered to those with a spotless credit history.
That said, if you have had a DMP, it is still possible to receive high LTV mortgages. Once again contacting a broker with unrestricted access to the market and experience of working with debt management plans is advisable.
But, if you have had a history of credit issues, the deposit amount will rise as well. If your credit history shows issues like CCJs and defaults, the deposit amount can be around 15-20%. Recency of the adverse credit will play a significant role here.
As such, be sure to check your credit history before filing a mortgage application to know what a lender will see while performing credit checks. This is advisable even for those who know they should have a completely clean credit profile.
Credit Score And Debt Management Plan Mortgage
A debt management plan is usually a sign of previous financial adversity. As such, it’s common for those with a DMP to have a relatively low credit score.
With a poor credit score, it is still possible to receive a mortgage, albeit with limited options. One can have the following credit issues in addition to the DMP and still be eligible for mortgages:
If you have had such issues in the past, you may approach an expert mortgage advisor who specialises in dealing with adverse credit. Of course, as your credit issues become increasingly severe, your mortgage options become limited as well.
DMP And Borrowing Limits
Typically, there is a limit on how much one can borrow with an active or resolved DMP. You may be able to borrow four to five times the annual income, based on how severe the credit issues are.
This will ultimately be determined by the lender who you approach is affordability calculations.
Should your DMP still be active, lenders keep the DMP in consideration while calculating your affordability. Based on whether they consider DMP as an expense or not (pretty much all will), you will be able to borrow a maximum amount.
And since this depends largely on the lender, knowing which one to approach who will work favourably for you in this regard is paramount.
Additionally, lenders will also examine your income streams carefully before providing you with the required loan. Note that the options may vary based on who you approach and your field of employment.
If you approach a high-street lender while being self-employed without a track record of self employment, you may not have many options to choose from at all.
It’s always advisable to enlist the help of a specialist mortgage broker whenever possible. The reason behind this is the flexibility they offer, as they tend to have a broader perspective when evaluating mortgage applications and lenders to approach.
Getting A Mortgage After Settling A DMP
As mentioned earlier, applying for a loan after settling a DMP will improve the chances of a better mortgage deal.
The more time passes after settling on a DMP, the more options will be accessible to you. Certain lenders offer the best rates if your DMP is settled over three years ago.
Moreover, a settled DMP is a net positive for your affordability assessment, as you are no longer paying a monthly amount for the plan.
This increases the amount you will be able to pay as a part disposable income for the mortgage, which lenders are likely to consider as well.
Remortgaging With A DMP
There are a few reasons why you would want to remortgage, including reducing your DMP or other debts. Luckily, it is an option that is open to you, provided that you keep a few things in mind.
‘Think carefully before securing debts against your home’
You must be ready for the paperwork and legal checks that accompany remortgaging. Affordability checks, lender tests and financial stress tests play an important role in the process as it would do if you were purchasing a property.
You may even consider approaching remortgaging in a way that is similar to a first-time mortgage application. After all, there are heavy similarities in both.
Note that approaching your existing lender may not be the best idea for a remortgage. There is still a chance that they reject your remortgage application, which is why it’s better to consider your current lender alongside others which may include specialist lenders.
If completing the transaction with your current lender – you may potentially do a product transfer for the amount on your current balance then a further advance for any additional borrowing. Different lenders will approach it differently
1. Is there a mandatory waiting period for mortgage applications after entering a DMP?
Certain lenders may require a 12-month waiting period after entering a DMP. This is because they can then assess if you have a track record of making the repayments. That said, so long as you meet other criteria, many lenders don’t need you to wait before applying for a mortgage.
2. How do late payments on DMP affect my mortgage options?
Late payments on DMP will see you struggle to find mortgages. When you do find a lender willing to lend the mortgage, they will demand a higher deposit amount.
In such cases, you may need to pay at least 25% of the property value to receive the mortgage. Although no exact rule this is likely to be higher.
3. Is DMP recorded on my credit file?
Debt management plans are, by definition, informal in ‘most’ cases. As such, they will not be marked on your credit file as such in some instances.
That said, outstanding debts as part of it will have a negative impact on your credit file for six years, which must be disclosed at the start of a mortgage and the lender will assess as part of the application.
A debt management plan does not impact your credit file as severely as a bankruptcy would. As such, you can get a mortgage with an active or settled debt management plan with some effort. The key to finding the best deal is to approach the situation in the right way.
It’s important to consult an expert mortgage advisor on the matter, as it can help you get a better deal and save time as well. Additionally, consider approaching specialist lenders, who are more likely to accept applications from people with credit issues.
By doing so, you will be able to choose from the best options and secure the most cost-effective deal in the process.
Your home may be repossessed if you do not keep up repayments on your mortgage.
All content is written by qualified mortgage advisors to provide current, reliable and accurate mortgage information. The information on this website is not specific for each individual reader and therefore does not constitute financial advice.