A new car may block the road to a mortgage

The amount you could borrow for a home can be dramatically affected by outstanding debt

Buying a car on finance could wipe tens of thousands off how much you can borrow on a mortgage, experts have warned. The number of people paying for a vehicle with a loan has ballooned in the past few years. A record 2.7 million new cars were sold in 2016 and more than 85 per cent of private car registrations were bought through some kind of finance deal, according to the Finance & Leasing Association.

Mortgage regulations dictate that lenders have to factor in the cost of car loan repayments when deciding on offers, and even monthly vehicle repayments of £200 can lead to you being offered £40,000 less on a mortgage.

“I am not sure people realise that the loans can make such a difference when they are factored into the affordability calculations, especially when they have other unsecured debts,” says Aaron Strutt, the product director at Trinity Financial, a mortgage broker.

He cites the example of one couple who had a combined salary of £75,000, two children, and a car loan, which cost £280 a month. Without the vehicle repayments they would have been offered a mortgage of £287,695, even after taking their credit card repayments and the cost of childcare into account. Yet their car commitment took a heavy toll and they were offered only £246,560. “It is also not unusual for people to have two cars on finance,” says Mr Strutt.

Another client earned £31,000, but was paying £330 a month for his car. It meant he could borrow only £116,800 on a mortgage, compared with the £154,000 he would have been offered without the debt.

As well as hire-purchase deals, new cars are often bought through personal loans. Personal loans mean that you get the money upfront and can buy the car outright from the dealer, and then pay off the loan over a period of one to five years. The downside is you need to have a strong credit rating to be eligible for the best rates.

The most competitive rate on a £5,000 unsecured loan paid back over three years is 3.7 per cent, from Hitachi Personal Finance. It would mean paying back £5,285.53 over the course of the loan. A rate of 3.8 per cent on the same £5,000 loan is being offered by three providers, Ikano Bank, M&S Bank and Cahoot. It would mean paying back just over £5,293.

Cheaper rates are available on larger loans. The best rate on a loan of between £7,500 and £15,000 is about 3 per cent, from lenders including M&S Bank, Cahoot, Clydesdale and Yorkshire, and Zopa.