Why your car loan could mean a much smaller mortgage

Figures reported in the Daily Mail suggest that more than 40,000 people a week are borrowing money to buy a new car. While the availability of car finance is helping thousands of people buy a new motor, it could also be having a huge impact on their ability to get the mortgage that they need.

Research has found that borrowers with car loans are being offered much smaller mortgages than other applicants, mainly due to tough affordability checks.

Car loans could knock £35,000 off your potential mortgage

The Daily Mail reports that more than 6,300 people a day are borrowing money to buy a car. Drivers have taken on £31.9bn of debt in the last year - up 10% on the year before - but many don't realise that these loans could impact their ability to get the mortgage that they need.

Mortgage expert Aaron Strutt, says: "Most people will have no idea that even a modest car loan can have a huge effect on the size of mortgage you can get. If you’ve got two or three cars on finance it can knock tens of thousands of pounds off the offer the lender will make. And if you’ve got car loans and other debts hanging over your head then you might even be rejected by banks."

The boom in car credit is being driven by Personal Contract Purchase - or PCP - plans which now account for more than eight out of ten sales where a driver buys a car on credit.

Under a PCP plan, you pay a lower monthly payment than a traditional car loan and, at the end of an agreed term, you can choose whether to pay a lump sum to buy the car or give it back to the dealer and get another deal on a new car.

Now, analysis by a leading mortgage broker for the Daily Mail has found that these car finance plans can significantly reduce the amount of mortgage you could get.

For example, a couple with a combined income of £60,000 can borrow up to £300,000 on a mortgage with major high street banks. However, if you are each paying £250 towards a car, your mortgage would fall by as much as £35,000. This is because banks are now required to take into account all your monthly outgoings, including debt repayments, when they work out how much to lend.

Alistair Hargreaves, from the broker that carried out the research, says: "Having lots of debt – whether that’s credit cards or car loans – also affects your credit rating and lenders take that into account."