When you enter into a debt solution like a Debt Management Plan (DMP), it’s natural to worry about how it could affect your ability to get a mortgage with favourable terms – especially if you’re looking to buy a home in the near future.
Making a mortgage application can be daunting enough without the added stress of having a DMP to deal with. However, the good news is, while it might be more difficult to convince a lender to give you a mortgage while you have a DMP, it’s not impossible.
What is a Debt Management Plan?
A Debt Management Plan (DMP) is an informal agreement between you and the people you owe (your creditors) to repay your debt at a more manageable rate.
It’s designed to help you deal with non-priority debts, which are debts that have less serious consequences.
Examples of non-priority debts you can deal with under a DMP include credit cards, personal loans, overdrafts, and store cards.
However, rent or mortgage, council tax, and utilities are classed as priority debts and can’t be included.
With a DMP, you’ll be expected to make payments until you’ve paid back your debt in full. D
epending on your debt level, this can take anywhere from a few months to a few years to complete your arrangement.
Because a DMP is an informal agreement, you won’t be subject to the same protections as a formal agreement.
This means that the interest doesn’t have to be frozen and you or your creditors can cancel it at any time.
How much debt do you have?
How does a Debt Management Plan work?
The DMP process can vary between providers, but it usually follows the same set of steps regardless of which provider you choose.
Here is what you can expect when you apply for a DMP:
Find a credit counsellor
DMPs are one of the few debt solutions that you can arrange yourself without the need for a third party. However, if you need extra help or support, it’s recommended to use a debt-help organisation or credit counselling company.
They will then match you with a credit counsellor who will review various details of your financial situation, such as your income, expenses, and debts.
They might also request further information from you about your accounts and creditors to get a better picture of where you stand financially.
During this consultation, it will be determined whether a DMP is the right debt solution for you.
Depending on the outcome, they will either work with you to draft your application or recommend another solution better suited to your circumstances.
Work out your monthly payments
The next step is to calculate how much you can afford to pay towards your debt each month.
To work out how much disposable income you usually have at the end of the month, carefully review your income and expenses.
Generally, the underlying goal of a DMP is to create an affordable payment plan that allows you to pay your debt over time in a way that’s much more manageable for you and your lifestyle.
Remember, if you have any priority or secured debts, these will still need to be paid outside of your DMP, so you’ll need to keep money for this.
Submit a suggestion to creditors
Once you’ve reviewed your finances in more detail, it’s time to make a payment suggestion to your creditors.
They will then decide whether to accept or reject the amount proposed.
If your creditors accept your payment suggestion, they might also choose to freeze interest and charges.
However, because a DMP is an informal debt solution, they’re not legally obliged to do so.
If your creditors don’t accept the payment plan put forward, you might be eligible for an alternative debt solution, such as an Individual Voluntary Arrangement (IVA).
Make your new monthly payments
The final step in the DMP process is making your new monthly payments.
If you choose to use a DMP provider, you will send your monthly payments directly to them rather than directly to your creditors.
They will then distribute the money among the people you owe.
This also means that you’ll only have one payment rather than several, which can make things much more manageable.
Am I eligible for a Debt Management Plan?
Like all debt solutions, there are certain eligibility criteria you’ll need to meet to be able to enter into a DMP.
Generally, a DMP could be the right debt solution for you if:
- You’re a UK resident
- You have at least £100 of disposable income a month
- You have multiple unsecured debts you’re struggling to manage
- You can afford debt repayments alongside your basic expenses
Compared to other debt solutions, the eligibility criteria for a DMP tend to be more flexible. It’s therefore a suitable option for those who don’t qualify for an IVA or who would prefer to have the option to alter or exit their arrangement at any time if they choose.
“No fuss, just simple, honest advice. Communication is good and they make the process as easy as they can.”
How will a Debt Management Plan affect my credit score?
The impact of a DMP on your credit rating depends on how you manage your arrangement.
For example, if you pay the full amount you originally agreed on the correct dates, the DMP shouldn’t appear on your credit file or affect your credit score.
Similarly, making smaller payments towards your debt through a DMP can show lenders that you’re actively dealing with your financial problems and are committed to improving your circumstances.
However, while the DMP itself won’t be added to your credit file, each individual debt will be classed as a partial payment and this will be marked on your credit report for as much as six years. They will then be automatically removed after this time – even if the debt isn’t fully repaid.
The good news is, there are many things you can do to improve your financial situation during and after a DMP.
By taking steps to boost your credit score, you can increase your chances of being accepted for credit.
Can you get a mortgage with a Debt Management Plan?
One of the most common concerns among those considering a DMP is whether it will affect their chances of getting a mortgage.
It’s difficult to get approved for any kind of credit when you have credit issues like a DMP – especially a mortgage.
Because your monthly payments will be less with a DMP, lenders will see this as an indication that you might not be able to afford another credit agreement and even if you’re offered credit, it will likely be at a higher interest rate.
However, while it’s difficult, it’s not impossible. Most high street banks will automatically reject your mortgage application, but a specialist mortgage lender may be able to find a suitable deal for you.
When you contact a specialist mortgage broker, they will take into account how long you’ve had the DMP, your total debt, the status of the DMP (satisfied or ongoing), and how you’ve managed your payments so far. They will then review other aspects of your financial situation to determine whether to approve your mortgage application.
It’s also worth remembering that your credit score will naturally improve once your DMP is complete and your debts have been paid off.
After this, it will be easier to get a mortgage with favourable terms.
Will a Debt Management Plan affect my existing mortgage?
DMPs don’t affect secured debts, so having a DMP shouldn’t have any effect on your current mortgage payments.
However, a DMP is an informal debt solution, so does not stop your creditors from taking legal action and this could potentially have an impact on your home.
Generally, most creditors are unlikely to start legal action while they are receiving payment towards the debt through a DMP as this could accrue further costs for them.
The only time this might happen is if you fail to cooperate with your creditors or miss several DMP payments.
This is why it’s never a good idea to miss a payment towards any type of debt solution if you can help it.
If you’re worried you’re going to miss payments on your DMP, always inform your provider at the earliest opportunity (ideally before you miss a payment).
One of the most serious consequences of missing a payment is the debt being secured to your home.
This is called a charging order and means that if you try to sell or remortgage your home before the debt is repaid, the money will go to your creditors, not you.
How can I improve my credit score after a Debt Management Plan?
Once you’ve completed your DMP, it’s important you take steps to boost your credit score to increase your chances of being approved for credit down the line.
Here are steps you can take to improve your credit history:
Register to vote
When you register to vote, your details will be added to the electoral roll. Lenders can then access this to check your information and if it matches up, they will be able to confirm your identity and rule out identity fraud.
Make payments on time
Making payments on your other credit agreements in full and on time (e.g. rent, bills) is the best way to grow your credit score over time.
Your payment history is the biggest contributor to your credit score as it shows you’re a responsible borrower.
Check your credit report
Although most of the information on your credit report is accurate, mistakes can occur. At least every few months, check your credit report and report any wrong or out-of-date entries to the relevant credit reference agency as soon as possible.
Limit your credit applications
The more times you apply for credit, the more lenders will think you’re reliant on credit. Therefore, you should only apply for credit if you absolutely need it and if you’re confident you’ll get accepted as a rejected application can damage your credit score further.
Debt help tailored to you
From writing off a large portion of your debt, to readjusting your budget, we’ll find a solution that suits you.
What other debt solutions are available?
A DMP can help you deal with the debts you can’t afford to repay by making smaller, more manageable monthly payments, but it isn’t the only option available.
Here are some alternative debt solutions you might be eligible for:
Individual Voluntary Arrangement
An Individual Voluntary Arrangement (IVA) is a legally binding agreement between you and your creditors to repay debts in monthly instalments over a set period (typically five years).
Once you’ve completed your monthly payments, any remaining debt will be written off and you’ll be free to make a fresh financial start.
Bankruptcy
Bankruptcy is a legal process that gives you a 12-month period of relief from the debts you can’t afford to pay before writing them off.
If you’re insolvent, you won’t need to pay anything towards your debt for the duration of your arrangement.
However, you will need to hand over your assets, which may be sold to repay the debt.
Debt Relief Order
Often described as a less formal and less expensive alternative to bankruptcy, a Debt Relief Order (DRO) is an insolvency solution that gives you a period of relief from your unaffordable debts before writing them off.
During a DRO – which usually lasts 12 months – you won’t have to make any payments and your creditors can’t take legal action against you.
Conclusion
Getting a mortgage with a DMP can be difficult as lenders will know that you’ve struggled with your finances and might struggle to keep up with payments on another credit agreement.
However, you might have more success getting a mortgage during a DMP with a specialist lender and you should have no problem getting a DMP after you’ve repaid your debt in full.
Once you’ve completed your DMP, it’s important to take steps to improve your credit score. This will boost your creditworthiness and your chances of getting credit down the line.
