Emily's Mortgage Services LTD

Week Four- Debt Hanging Around, Let’s Talk!

Getting a mortgage is about more than just having a deposit—it’s about showing lenders you can manage debt responsibly. The way you handle your finances can make a big difference in how much you’re offered and at what rate. Here’s how to optimise your debt in 2026 so lenders see you as a low-risk borrower.

---

Understanding the Debt-to-Income (DTI) Ratio

Your Debt-to-Income (DTI) ratio is one of the key metrics lenders use to assess your mortgage application.

DTI Formula:$$\text{DTI} = \frac{\text{Monthly Debt Payments}}{\text{Gross Monthly Income}} \times 100$$DTI=Gross Monthly IncomeMonthly Debt Payments​×100

• Example:
  • Monthly debt payments (credit cards, personal loans, car finance): £500
  • Gross monthly income: £3,000
  • DTI = (500 ÷ 3,000) × 100 = 16.7%

Why it matters:

• Lenders prefer a DTI below 35–40% (varies by lender).
• Lower DTI = more borrowing power and better mortgage rates.

---

Should You Pay Off Debt or Save for a Deposit? A Decision Framework

It’s a common dilemma: Should you reduce existing debt or build a deposit? Here’s a framework to guide your decision:

1. High-Interest Debt First:
   • Credit cards or payday loans with 15–25% interest? Pay these down immediately.
2. Low-Interest Debt:
   • Student loans or car finance at low rates? Sometimes it’s better to save for a deposit instead.
3. Small Wins vs. Big Goals:
   • Paying off a small loan can improve your DTI quickly and give a psychological boost.
4. Balance Sheet Approach:
   • Compare expected interest saved by paying off debt vs. potential gains from your savings (e.g., LISA bonus, interest from Cash ISA).

Rule of Thumb: Prioritise high-interest debt, then split resources between debt reduction and deposit saving.

---

How Lenders View Different Types of Debt

Not all debts are treated equally. Understanding how lenders look at them can help you strategise:

Debt Type	How Lenders See It
Personal Loans	Counted fully toward monthly obligations. High balances can reduce borrowing power.
Car Finance	Counted toward DTI; longer-term loans may have lower monthly impact.
Credit Cards	Minimum payments count toward DTI; high balances relative to limits can hurt credit scores.
Buy Now, Pay Later (BNPL)	Increasingly considered by lenders. Even if interest-free, monthly commitments may reduce mortgage eligibility.

💡 Tip: Keep credit card balances low relative to limits (<30%) and avoid opening multiple BNPL accounts before applying for a mortgage.

---

Preparing Your Payslips and Income for Mortgage Underwriting

Lenders scrutinise your income and employment history as much as your debt profile. Here’s how to make sure your application looks strong:

1. Payslips:
   • Most lenders require the last 3 months’ payslips.
   • Ensure your payslips are consistent with the income you declared.
2. Bank Statements:
   • Provide at least 3 months of statements showing salary deposits and outgoing debt payments.
3. Side Income or Bonuses:
   • Some lenders count regular overtime, bonuses, or side income, but check in advance.
   • Document these with payslips, contracts, or invoices.
4. Self-Employed Income:
   • Typically requires 2–3 years of accounts or SA302 tax documents.

---

Quick Checklist for Optimising Debt Before Applying

• Reduce high-interest debt first.
• Keep low-interest debts manageable.
• Minimise credit card balances and BNPL commitments.
• Ensure payslips, bank statements, and bonus documentation are complete.
• Aim for DTI under 35–40%.

By strategically managing your debts and understanding how lenders assess them, you can maximise your mortgage eligibility—and potentially secure a better interest rate.