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Credit card debt is cutting into people’s ability to get a mortgage, as high interest rates and living costs have put household finances under strain, brokers have warned.
Outstanding balances on credit cards are rising at an annual rate of 9.9 per cent in the 12 months to March 2024, according to figures released on Tuesday by industry body UK Finance. About half of these (49.8 per cent) incurred interest.
Mortgage brokers, however, said more people seeking to take out a home loan were saddled with credit card debt they were struggling to pay down. Unsecured credit such as card debt or car finance is included in the criteria determining mortgage affordability.
Aaron Strutt, product director at broker Trinity Financial, said: “We are speaking to more people with chunky credit card balances. Some of them are trying to consolidate their debt, although they are struggling because of their high debt-to-income ratios.”
Many were unaware of the consequences for their ability to borrow, he added. “They may struggle to get a mortgage, although lenders have different acceptance criteria.”
The growth rate in credit balances rose sharply between 2021 and 2022, but has since levelled off, with an average monthly figure for the past 12 months of 9.3 per cent.
Andrew Montlake, managing director at broker Coreco, said many households were under stress. “People living with sizeable credit card balances that they can’t shift is becoming more and more common. The cost of living crisis, coupled with higher mortgage rates, has impacted people’s ability to pay their credit card balances in full.”
Mortgage interest rates remain high, as the Bank of England continues to hold its base rate at 5.25 per cent. The average two-year fixed residential mortgage rate is 5.97 per cent, according to Moneyfacts, while the five-year average today is 5.54 per cent.
Dariusz Karpowicz, director at broker Albion Financial Advice, said mortgage pressures were likely to persist until the BoE reduced its rate: “This rise in debt is starting to impact people’s ability to get a mortgage.”
Some borrowers with multiple debts consolidate them when applying for a mortgage, which simplifies their debts by combining them at a single interest rate. This may be lower than they would otherwise qualify for, but comes with risks. “Unless you make overpayments, it’s often more expensive in the long run,” said Graham Cox, director at broker Self-Employed Mortgage Hub.
