Does Having A Phone Contract Affect How Much You Can Borrow On A Mortgage?

A phone contract might not be the first thing that comes to mind when considering what factors contribute to how much you can borrow on a mortgage. However, it's important to understand how a phone contract can impact your credit score and, consequently, how much you can borrow on a mortgage.

In this insight, we answer the question, does having a phone contract affect how much you can borrow on a mortgage? 

Key Takeaways

• Your credit score is crucial for mortgage borrowing, as it affects the terms you receive and the loan amount you can obtain.
• Phone contracts can impact your credit score and, in turn, affect your mortgage application, with timely payments improving your credit rating and missed payments or defaults damaging it.
• Mortgage lenders consider your phone contract, via your credit report, as part of their assessment, viewing a well-managed contract positively and negative credit marks raising concerns.
• To minimise the impact of phone contracts on your mortgage application, regularly check your credit report, make timely payments, limit credit applications, choose the right contract, and address any issues or errors promptly.

The Importance of Credit Scores

When you apply for a mortgage, lenders will assess your credit history to determine whether you are likely to repay the loan. Your credit report gives them an idea of your financial responsibility and reliability. If they find any negative information, such as late payments, defaults, or a high number of recent credit checks, they may view you as a risk and either decline your mortgage application or limit the amount you can borrow. Despite this, there is no minimum credit score for a mortgage, there are many factors that make up mortgage approval.

Many lenders have their own internal credit scoring system. For example, if you are rated an 'A' customer, you may only need to put down a deposit of 5%. However, if you are a 'C' rated customer, you may need 20% deposit to balance the lender's risk. Having a few hiccups on your credit report could easily change your rating with your lender. That has the potential to throw your ability to buy completely out.

Phone Contracts and Credit Reports

Phone contracts are considered a form of credit because you usually receive a handset and a service plan, with monthly payments made after the usage of the service. Some providers even offer split contracts, where the cost of the handset and the service plan are separated. As such, phone contracts are subject to credit checks by mobile providers, who assess your credit history to determine your eligibility for a contract.

How Phone Contracts Affect Your Credit Report

The way you manage your phone contract can have a significant impact on your credit report. If you make timely payments, it can improve your credit rating, demonstrating your ability to manage financial obligations responsibly. However, late or missed payments can damage your credit score, making it more difficult to secure a mortgage or other forms of credit in the future.

Phone Contracts and Mortgage Lenders' Assessments

Lenders may consider your phone contract when assessing your mortgage application, as it can provide insight into your financial management skills and overall creditworthiness. A well-managed phone contract with a history of timely payments can be a positive factor in your mortgage application. However, missed payments or defaults can raise red flags for lenders, potentially leading to higher interest rates or reduced borrowing capacity.

Phone Contracts and Credit checks

When you apply for a phone contract, a credit check is conducted, leaving a "footprint" on your credit report. An excessive number of credit checks in a short period can indicate desperation or excessive borrowing, which may negatively impact your mortgage application. To avoid damaging your credit rating, it's essential to be mindful of the number and frequency of credit applications, including phone contracts.

Common Issues with Phone Contracts and Mortgage Applications

Missed Payments and Defaults

Missed payments and defaults on phone contracts can significantly impact your ability to secure a mortgage. These negative marks remain on your credit report for six years, making it more difficult to obtain credit during that time. It's crucial to stay on top of your phone contract payments and address any missed payments or defaults as soon as possible to minimise their impact on your mortgage application.

Disputes and Errors on Credit Reports

Disputes and errors related to phone contracts can also affect your mortgage application. It's essential to regularly check your credit report to ensure that all information, including details about your phone contract, is accurate and up-to-date. If you find any discrepancies or errors, contact the relevant credit reference agency and mobile provider to have them corrected.

How to Minimise the Impact of Phone Contracts on Mortgage Applications

Check Your Credit Report Regularly

Monitor your credit report regularly to ensure that all information related to your phone contract is accurate. This will help you identify and address any potential issues before they impact your mortgage application. You can obtain a copy of your credit report from credit reference agencies such as Experian or Equifax for a small fee.

Make Timely Payments

Consistently making timely payments on your phone contract is one of the best ways to maintain a healthy credit score and improve your chances of securing a mortgage. Set up a direct debit to ensure you never miss a payment, and consider using budgeting tools or apps to help manage your finances effectively.

Limit Credit Applications

Be mindful of the number of credit applications you make, including phone contracts, as too many checks within a short period can negatively impact your credit score. Space out any credit applications and consider the potential impact on your mortgage application before applying for additional credit.

Choose the Right Phone Contract

Select a phone contract that suits your financial situation and is within your means. Opting for a more affordable contract with a lower monthly payment may have a less significant impact on your mortgage application, while still allowing you to enjoy the benefits of a phone contract.

Alternatives to Phone Contracts

Pay-as-You-Go Plans

If you're concerned about the potential impact of a phone contract on your mortgage application, consider choosing a pay-as-you-go (PAYG) plan instead. With PAYG, you only pay for the services you use, eliminating the need for a credit check and reducing the risk of missed payments affecting your credit score.

SIM-Only Contracts

Another alternative is a SIM-only contract, which provides a monthly allowance of calls, texts, and data without including a handset. These contracts often require a shorter commitment and may be less likely to affect your mortgage application, as they involve a lower monthly payment and are not tied to a specific handset.

Addressing Phone Contract Issues Before Applying for a Mortgage

If you discover any issues or errors related to your phone contract on your credit report, work proactively to resolve them before applying for a mortgage. Contact the mobile provider and credit reference agency to address any discrepancies and ensure your credit report accurately reflects your financial history.

Pay Off Outstanding Balances

If you have any outstanding balances on your phone contract, pay them off before applying for a mortgage to improve your credit score and reduce the likelihood of being declined or receiving unfavourable terms.

Communicating with Mobile Providers and Mortgage Lenders

Maintaining open communication with your mobile provider and mortgage lender can help address any issues or concerns related to your phone contract. If you encounter difficulties making payments or are disputing an error on your credit report, inform both parties promptly to avoid potential complications with your mortgage application.

Provide Documentation

When applying for a mortgage, be prepared to provide documentation related to your phone contract, such as payment history and account statements. This can help demonstrate your financial responsibility and commitment to meeting your obligations, potentially improving your chances of securing a mortgage.

Applying For Your Mortgage

While having a phone contract does not directly affect the amount you can borrow on a mortgage, it can impact your credit score and overall creditworthiness, which in turn influences your mortgage application. By carefully managing your phone contract, regularly checking your credit report, and addressing any issues that arise, you can minimise the impact of your phone contract on your mortgage borrowing capacity.