Mortgages with a Debt Management Plan (DMP)
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What is a Debt Management Plan?
A debt management plan is a non-formal arrangement between you and any parties you may owe money to, for the repayment of what are classified as non-priority debts. These are things like mobile contracts, store cards, credit cards, loans and other retail credit arrangements. In order to get a DMP, you must be able to afford your mortgage or rent, utility bills, council tax and other living costs, as well as what you plan to pay towards your non-priority debts.Read More
You will usually need to get a DMP practitioner to arrange and manage your plan – they will act as an intermediary between you and whoever you owe money to, negotiating with them on your behalf and acting as the conduit for payments. Some DMP practitioners are free – the three main free ones being StepChange, Payplan and National Debtline – while others will charge a fee, typically an initial arrangement charge and thereafter a monthly fee for handling the transactions. You pay the practitioner the agreed instalments towards your DMP, and they will deduct their fee (if applicable) before forwarding the appropriate sums to your creditors.
The main difference between a DMP and an IVA (Individual Voluntary Arrangement), aside from the legal status, is that interest on the debt(s) is not frozen once the arrangement is in place. It may take a long time to finally clear debts, especially as you will likely be paying smaller instalments under a DMP than you would without one
As DMPs are not legally binding, you can cancel them at any time and are still free to take out new lines of credit.
Mortgages with a DMP Information
Mortgages for people on a Debt Management Plan
It might be more difficult for you to apply for a mortgage while you are still on a debt management plan, rather than having completed one, but there are lenders on the market who can help. Specialist lenders who work with those who have had financial issues will take a more personal approach and assess your circumstances as a whole rather than rejecting you outright because of scores or numbers.
Mortgage if I have a DMP
Lenders specialising in so-called ‘bad credit mortgages’ will pay attention to all the usual criteria when assessing your application and what you can afford – your income and various outgoings (including your DMP contributions). They will also consider the factors around any other credit problems – how severe they are, and the length of time since they happened.
For example, if you have recently had a CCJ or were declared bankrupt, then it will be more difficult to find a lender who will accept you for a mortgage. If, however, your history contains records of less-serious issues, like late payments or limited arrears that have since been cleared, then the right lenders might not see this as so much of a problem. In all cases, how long ago these events occurred does play a factor, with older cases carrying less weight when the lender makes their decision than more recent ones.
Why is it harder to get a Mortgage with a DMP?
It is always the lender’s decision whether they will give you credit, or not. High street lenders tend to base their decisions on a credit score or rating, and will interpret figures and information they get from the three main credit reference agencies – TransUnion, Equifax and Experian – according to their own criteria.
You’ll need an exemplary credit score, and often a large deposit, to get access to the best deals on offer on the high street, but this is sadly unlikely if you are coping with adverse credit events or ongoing repayment plans. Especially with a DMP, every month you make a payment according to your plan, it can show up as an underpayment on your credit report. This may sound unfair, but it stems from your repayments to your creditors being lower than you agreed under a contract, and the reduced payments may be recorded as lesser defaults. With constant repayments going on, it’s also unlikely you’ll have the money for a large deposit.
The combined result of all this is that you will find less options available to you with a DMP from the mortgage lenders across the market. However, this does not mean that getting a mortgage is impossible.
How much can I borrow if I have a DMP?
Your credit history will affect the ‘loan-to-value’ (LTV) ratio of a mortgage offer – how much you can borrow compared to the market value of the property. With an active or past DMP, it is unlikely you will be able to borrow at a high LTV ratio like 95%, which the government’s current Help-to-Buy scheme helps to enable, to make lending more widely accessible. Lending is likely to be restricted to 85% of the property’s value if you have a history of defaults or CCJs (County Court Judgements), so you will be expected to provide a 15% deposit. More serious credit issues might mean a lender will ask for an even higher deposit, to reduce their perceived risk.
Do I need a larger deposit if I have a DMP?
A lender could be likely to ask for a larger deposit, but the issue here is when you are using any disposable income to pay off your debts under a DMP, you will not be able to save any more money for a deposit.
If necessary, you might be able to try other courses of action to raise funds, such as selling or cashing in assets. The problem here is that if you do this, you may then be under pressure to use that money to pay off debts rather than contribute to a bigger deposit for a mortgage. And also, cashing in a financial product linked to life assurance could have other implications. You should always seek sound financial advice as to the future impact of these actions from a financial adviser before doing this.
Getting a Mortgage with a Debt Management Plan
A DMP could affect the kinds of mortgage deals available to you across the market, as lenders will consider it when assessing the affordability of a possible loan. You could have both less options and less finance available to you while you have a DMP.
Lenders extend credit to people with multiple other financial commitments than their mortgage all the time – as a matter of daily life, people will have credit cards, personal loans and finance arrangements for domestic items. But the nature and size of all these debts will have an impact on their assessment of affordability of a mortgage and, especially if you have a DMP in place, they will query exactly what you may be able to pay.
The positive side of having a DMP is that it demonstrates you are willing and able to take responsibility and have taken steps to clear the debt and get your finances in order.
The other factor to bear in mind is that if you are currently renting or downsizing, your monthly payments for accommodation could actually be reduced with a new arrangement, making your possible mortgage payments more affordable.
Can I Remortgage with a DMP?
Many people remortgage their property – staying in the same place but getting a new mortgage on it – to free up cash for various reasons. It could be for home improvements, another large purchase, or perhaps an investment.
Remortgaging can seem attractive for someone with a DHP, as it can provide the opportunity to release enough equity to completely clear – or pay off a substantial amount of – any outstanding debts.
The first thing to remember when remortgaging with a DMP is that your existing lender will still assess your mortgage application in line with their usual criteria. If you do not meet the conditions or credit score that they like, then they are likely to decline your application, even though you already have a mortgage with them.
To apply for a remortgage on a property, you will also need to already own a sizeable portion of it. Time is in your favour here, as you could have purchased your property when the market value was less in the past, therefore needing a smaller mortgage at the time – so your property could have increased in value while the proportion of your mortgage you have paid off will also have improved. If the current value is £300,000, and you have paid £100,000 of a £150,000 mortgage, with your current LTV ratio being 50% it is likely you would be able to release a decent portion of the extra equity.
If you have more recently purchased a home that has not increased much in value, and still have a large portion of the mortgage to pay, then your LTV ratio may be too high for most lenders.
In either case, the lender will focus on affordability, so the size of your debts will be an important factor in their decision.
Getting a Mortgage with a settled Debt Managment Plan?
Like all other adverse credit issues, a DMP will stay on your credit record for six years, whether settled or not, and during this time may affect your credit score and therefore a lender’s decision. You might have difficulty in finding a mainstream mortgage lender who will accept your application. This said, you are more likely to have a lender give you a mortgage with a completed DMP than with one that is still active. Bear in mind that lenders will still have to consider any other adverse credit events on your records when making their decision.
When trying to get a mortgage after you have settled a debt management plan, the first thing you need to do is get copies of your credit reports. Make sure that all the basic details are correct – addresses, dates and electoral roll registration. This last point is important – being registered to vote adds valuable validation to your identity, and will help your credit score. If you are not already registered, we advise you do so ASAP.
The next stage is to check that all the details of credit accounts and debts are correct – the amounts, dates and if they have been settled or satisfied. If anything is incorrect, for example if a debt was fully paid off but not showing as such, or a debt was recorded where it was not the case, then contact the company responsible and ask them to update the status of the debt. They are not obliged to, but if they do it will be a great help. Make sure to copy the letter to the main debt reference agencies – TransUnion, Equifax and Experian.
Finally, take steps to rebuild your credit history by taking out a credit card, using it for regular spending and paying it off on time at the end of the month, or taking out a small loan and similarly keeping up with the regular repayments. It’s a good idea to set up direct debits for all loan repayments, so they always go on time. You just need to ensure you have enough money in your account to cover them.
How do I get a mortgage with a DMP?
It is still possible to get a mortgage, despite having a DMP in place. Specialist mortgage lenders exist in the market catering directly to the needs of people who have experienced financial issues, and who will make decisions based on a wider range of factors.
The best thing to do is to discuss your situation and what you’d like to achieve with a qualified mortgage broker who has direct experience with the ‘bad credit mortgage’ market. Here at The Mortgage Centres, we’ll be able to help you find a provider who understands DMPs and allow you access to deals you will not find on the high street.
Mortgages with a DMP FAQs
- How long does a DMP need to be set up for to enable me to get a mortgage?
- Do all my payments to the plan need to be made on time and in full?
- Does the DMP need to be satisfied before applying for a mortgage?
- Can I pay off my DMP early?
- Do you take my payments to a DMP as a deduction monthly?
- How long does a DMP stay on your credit file?
- How long does a Debt Management Plan last?
This will depend on the individual lender’s own criteria, but it is typically twelve months. You’ll probably be asked to put down a bigger deposit and pay a higher interest rate on the loan, however long a DMP has been set up. Lenders always look at affordability when making mortgage offers. If you are already paying off other debts, then they will need to know how you will sustain mortgage payments on top of this.
A dilemma might arise if you have managed to save up a decent-sized deposit – should you use this to pay off your DMP and relieve your ongoing commitments, or it is best used as a down-payment on a property? A specialist bad credit mortgage adviser will be best-placed to tell you what to choose according to your specific circumstances.
This is very important, and the answer is a resounding yes. A DMP is not legally binding and can be cancelled at any time, but doing so or being late with payments will further damage your credit rating.
This said, if you find yourself in financial difficulties because of keeping up with your DMP, and having trouble paying bills on top of instalments, then you should contact your DMP Practitioner to see if they can help. One of the roles of their job is to make sure you can still afford to live while working through a DMP, and they may find it necessary to renegotiate your payments to creditors so you have enough money for household expenses.
It is still possible to get a mortgage with an active DMP, but lenders will be more cautious and your options will be more limited. You will probably also need to put down a larger deposit and pay a higher interest rate on the loan.
Mainstream lenders might not be of much help, but there are specialist lenders who cater for people with a poor credit history, who so not automatically see a DMP as a red flag, and will assess each application on its own merits. Our experienced advisers will know which ones will be the best to approach in your case.
Yes, this is entirely possible, and usually desirable. If your cash flow is healthy enough, or you have come into some money you can use, then you can settle the debts and close the DMP. Also, if you have been in a DMP for six months or more, you are able to make lump-sum offers to your creditors, who may be willing to accept perhaps 50% of the amount owed if they get that cash immediately. You can do this with one or more of your creditors, depending on what you are able to pay.
A DMP is normally arranged and managed by a DMP practitioner, who will assess your financial situation and act as your intermediary between you and your creditors, carrying out all negotiations. Once you have an agreement in place, you will make the required monthly payment direct to the DMP practitioner, who will then deduct any fee they charge (some will charge you, others won’t), and make the agreed payments to your creditors from the balance. This consolidates all your debt repayments into one simple sum each month, no matter how many creditors are involved. Lenders will then take this monthly commitment into account when assessing the affordability of a mortgage, in the same way they would any other loan payment.
The DMP itself will not appear on your credit record, but the debts still outstanding will. Creditors paid through a DMP might put a note to this effect on the report, and the accounts that are still technically in arrears will still show as such until the fall out of the six-year scope of a credit check. A DMP will also need to be disclosed as part of any mortgage application, no matter the status of debts it covers on your credit file.
This will depend entirely on your circumstances – the amount of debts accrued, your income and outgoings, the amounts you are able to agree with creditors and what you can afford to pay each month. When all this is known, you will be able to know how long it will take to pay off.