Buying a new car is often seen as a milestone, a symbol of success or a practical necessity. However, what many people don’t realize is that buying a new car could mean getting a smaller mortgage. This decision could have a significant impact on their ability to secure a larger mortgage. Lenders take into account all your financial commitments, and car finance payments are no exception. These payments can reduce your disposable income, which in turn affects how much you can borrow for a home.
The Impact of Car Finance on Mortgage Borrowing
When you apply for a mortgage, lenders conduct affordability checks to determine how much you can comfortably repay each month. Most borrowers are limited to a mortgage worth no more than 4.5 times their gross annual salary. However, car finance payments are treated as fixed outgoings, which lower your disposable income and directly reduce the amount a lender is willing to approve.
For example, research by Coventry Building Society highlights the financial trade-offs involved in car financing. Financing a Ford Puma, the UK’s most popular car in 2024, with a monthly payment of £345 could reduce a single buyer’s mortgage borrowing capacity by £18,423, says This Is Money. For joint buyers, the reduction could be £13,205 each if both have similar car finance agreements. Similarly, financing a Kia Sportage with a monthly payment of £397 could reduce a single buyer’s borrowing capacity by £24,548.
Real-Life Implications
The implications of these reductions are far-reaching. For those looking to buy a home, this could mean compromising on the size or location of the property. It might mean settling for a smaller home, losing out on an extra bedroom, or delaying the purchase altogether to save more for a deposit. In a competitive housing market, these compromises can be particularly challenging.
Jonathan Stinton, head of mortgage relations at Coventry Building Society, advises potential homebuyers to carefully consider the implications of car finance agreements. According to The Intermediary, he notes that a car payment of £345 could significantly hamper borrowing power, potentially leading to compromises such as opting for a smaller home or delaying the purchase to save more.
Why Lenders Factor in Car Finance Agreements
Lenders are cautious because car finance payments are long-term commitments that can’t easily be adjusted. Unlike discretionary spending, these payments are fixed and must be accounted for in affordability checks. This ensures that borrowers can manage their mortgage payments alongside other financial obligations.
For instance, someone earning £40,000 per year can typically borrow up to £180,000. However, when a PCP car finance payment is included, it is treated as a fixed outgoing, lowering disposable income. This directly reduces the amount a lender is willing to approve for a mortgage.
Balancing Priorities
While buying a new car can be an exciting decision, it’s essential to weigh the trade-offs, especially if you’re planning to buy a property. Understanding how car finance agreements affect your mortgage borrowing power can help you make informed financial decisions and avoid unexpected setbacks, no one wants those.
If you’re considering both a new car and a new home, it might be worth prioritizing one over the other. For example, delaying the car purchase until after securing a mortgage could give you more flexibility in the housing market. Alternatively, opting for a less expensive car or avoiding finance agreements altogether could help preserve your borrowing capacity. You’ll do what’s best for you at the end of the day.
Considerations
Overall, buying a new car on finance is not just a decision about transportation; it’s a financial commitment that can have ripple effects on other aspects of your life, including your ability to buy a home. By understanding these implications and planning accordingly, you can make choices that align with your long-term goals and make the decision that’s right for you.
