Can I get a mortgage when in a debt management plan?

If you are in a debt management plan, getting a mortgage is not impossible. But you may need a larger deposit and be prepared for pay a higher rate of interest.

A debt management plan (or DMP) can be used to manage a personal debt problem. It is an informal agreement with your creditors to significantly reduce monthly payments to unsecured debts like credit cards.

Although reducing the amount that your creditors are paid each month can be a life saver, this does not come without a cost. One of the effects of a debt management plan is that your credit rating will be damaged.

Credit rating damaged by defaults

If you start a DMP you are agreeing to pay less than the contracted minimum monthly payments to your creditors. As a result they will normally issue a default notice against you. This default will be recorded on your credit file.

A default notice will remain on your credit file for 6 years and will warn other potential lenders that their risk of not being paid by you is higher than normal.

The fact that default notices are registered against your file will generally prevent you from taking more unsecured credit until your debts are repaid first.

However, it is still possible to get a mortgage.

Moving home or equity release

Because a mortgage is secured against a house, some mortgage companies are more willing to risk lending to people who have a poor credit rating. They will offer what is known as an adverse mortgage.

If you already have a property, you may want to move or release equity from your home to pay off your debt.

There are adverse mortgage lenders who will consider lending to you. However, you must be prepared for the fact that most of these lenders will not let you borrow more than 75% of the value of the property. 

This ceiling on borrowing is designed to protect the mortgage lender against future falls in the price of your house where they are forced to repossess the property if you do not keep up your payments.

First time buyers

If you are in a debt management plan and are looking into buying your first home, again this is possible with an adverse mortgage. However, there are a couple of things to be aware of.

Firstly you will need a sizable deposit. In today’s mortgage market, first time buyers will generally need a deposit of 20% of the property’s value. If you are in a DMP and struggling financially, this size of deposit you require could be nearer 30%. Secondly, you need to plan very carefully for the ongoing cost of living in your own house. When reviewing your budget, there will be new costs which did not exist when you were renting such as building’s insurance, maintenance and repairs.

If you are already trying to repay debt, the last thing you should do is take on a mortgage only to find that you can no longer pay your debt management plan because your living expenses have increased.

At the end of the day, it is possible to get a mortgage when you are in a debt management plan. However, the reality of today’s mortgage market is such that this will be difficult especially as house prices and equity has fallen.

If you are a first time buyer, again it is possible to take a mortgage if you are in a DMP. However, this would have to be carefully thought out. In general, it may well be advisable to consider resolving your debt problem first before trying to get in to the property market.

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