If you have a Debt Arrangement Scheme (DAS) and are considering purchasing a home, you might be wondering how your arrangement will affect the mortgage process – or whether you can get a mortgage at all.
Mortgage lenders will conduct a thorough assessment of your credit history and financial obligations before approving you for a loan and a DAS can have a significant impact on your mortgage prospects.
However, while being in a DAS will make obtaining a mortgage more challenging, it’s not impossible and you do have options.
What is a Debt Arrangement Scheme?
A Debt Arrangement Scheme (DAS) is a formal, government-approved debt solution designed to help people who are in financial difficulty repay their unsecured debts over an extended period.
Under a DAS, your unsecured debts will be consolidated into a single monthly payment worked out through a review of your income and expenditure and distributed among your creditors by an approved payment distributor or money advisor. This is known as a Debt Payment Programme (DPP).
Once your DAS has been approved, your creditors won’t be able to contact you for payment, take legal action against you, or add any further interest and charges to the debt.
Like a Debt Management Plan (DMP), there is no set time a DAS lasts and you’ll be required to make payments until your total debt has been repaid.
This can take anything from four years to 20 years depending on your debt level, but the average length is six and a half years.
One of the main advantages of a DAS is being able to repay your debt over a reasonable period without the added pressure of your creditors chasing you for payment or threatening you with legal action.
How does a Debt Arrangement Scheme work?
The DAS application process is fairly straightforward and typically takes around six weeks from start to finish.
Here is a brief guide to what you can expect when you apply for a DAS:
Set up a Debt Payment Programme (DDP)
The first stage of the DAS application process is working with an approved money adviser or debt management company to decide if a DAS is a suitable option for your financial circumstances.
They will assess your unsecured debt and draft a Debt Payment Programme (DDP), which is a legally recognised agreement between you and your creditors outlining how you plan to repay your debts over a set period.
For a DDP to be drafted, your money adviser will require proof of your income, debts and liabilities, and address.
Obtain creditor approval
Once you’ve reviewed and signed your DPP, your money adviser will send a copy to your creditors and they will have 21 days to accept or reject the terms of the proposal.
The Accountant in Bankruptcy (AiB) – the government department responsible for administering personal insolvencies – will send you and your money advisor a letter or email letting you know how your creditors voted.
Even if your creditors disagree, your DPP can still be approved if your money adviser believes it’s ‘fair and reasonable’.
Follow a payment schedule
Once your DAS has been approved, all interest and charges will be frozen and you’ll be expected to make your first payment within 42 days.
Remember, your monthly payments will be based on the amount of money left over after your essential living costs have been met and you’ll never be made to pay more than you reasonably afford.
With a DAS, your assets won’t be at risk and, in most cases, you’ll still be able to use your bank account and access essential credit as normal.
What are the eligibility criteria for a mortgage?
There are certain financial benchmarks you must meet to be able to secure a mortgage – whether you’re on a DAS or not – and lenders will carefully assess your financial history and current stability before approving your mortgage application.
Here are just some of the factors lenders will assess when considering your mortgage application:
Your credit score
Mortgage lenders will evaluate your credit score when assessing you for any type of loan and a mortgage is no different.
Experian recommends a credit score of 721-880 to be able to access good mortgage deals with reasonable interest rates, although some government-backed schemes and specialist lenders may be more lenient.
However, it’s important to remember that your credit score is just one of many factors lenders will consider when assessing you for a mortgage on a DAS and lending criteria differ from lender to lender.
Your job and income
Mortgage lenders typically need evidence of stable employment and a steady income as reassurance that you’ll be able to sustain your mortgage repayments for as long as is required.
They may also require you to have been in your current role for at least two years or, at the very least, have a relatively consistent employment record with no major gaps.
This will prove that you’re in a position to make regular payments towards your mortgage, are unlikely to default on your loan, and ultimately pose less risk to the lender.
Your debt-to-income ratio
‘Debt-to-income (DTI) ratio’ is a measure of how much of your income is spent on debt repayment each month and is a factor commonly used to assess your borrowing capability.
Most lenders prefer a DTI ratio of less than 36% but 43% is generally considered the maximum DTI ratio you can have and still qualify for a mortgage.
However, the maximum DTI ratio tends to vary from lender to lender so this information should only be used as a guide.
How will a Debt Arrangement Scheme affect my mortgage application?
Having a DAS can have major implications on the mortgage application process, but understanding these impacts is essential for navigating this financial journey effectively.
Some of the factors that can affect your mortgage application on a DAS include:
The risk to your lender
When you apply for a mortgage, lenders will conduct a thorough evaluation of your credit history to assess your risk as a borrower.
Being on a DAS tells lenders that you’ve previously faced difficulties in managing debts and this can directly influence their decision to approve your mortgage.
As a high-risk borrower, your application will be treated with more caution and you’ll likely face higher interest rates, a larger deposit, and stricter lending criteria.
The products you can access
Being in a DAS can limit the range of mortgage products available to you and lenders may restrict their offerings based on their policies towards applicants in ongoing debt solutions.
This may mean you’re offered lower borrowing limits and fewer competitive rates compared to someone without a DAS.
However, working with a specialist broker can help you find the right mortgage product for you and you’ll likely waste less time and face fewer rejections as a result.
How can I prepare for a mortgage on a DAS?
When preparing for a mortgage on a DAS, it’s critical to address two key areas: enhancing your creditworthiness and gathering necessary documentation.
Paying attention to these details can boost your chances of getting a mortgage and make the mortgage process much less challenging and time-consuming.
Here is a brief guide to how each of these areas can help you on your journey towards a mortgage on a DAS:
Enhancing your creditworthiness
Enhancing your creditworthiness (how ‘worthy’ you are of credit based on how you’ve handled credit in the past) can significantly improve your chances of mortgage approval.
This can be done by carrying out the following steps:
- Review your credit file: Obtain a free copy of your credit report from any of the main credit reference agencies (Experian, Equifax, or TransUnion) and look for mistakes that might be affecting your credit rating
- Manage existing debt: Keep up with any pre-existing financial obligations and make payments in full and on time to demonstrate a level of financial reliability
- Avoid taking on new debt: Refrain from taking out any new credit agreements that are likely to hurt your DTI ratio
- Build a savings record: Regularly deposit small amounts of money into a savings account to show lenders you can manage your finances responsibly
- Contact financial advisers: Seek advice from debt professionals on how to best present your financial situation when applying for a mortgage under a DAS
Gathering necessary documentation
Organising key documentation ahead of time can streamline the mortgage application process.
Before you apply for a mortgage, be prepared to provide the following paperwork:
- Proof of income: Gather your payslips from the last 3-6 months as well as any recent tax returns or accounts if you’re self-employed
- Bank statements: Source bank statements from the past 3-6 months for all bank accounts to prove your income and expenditure
- Proof of deposit: Evidence of your savings and any funds to be used for your deposit can reassure lenders that you’re in a position to apply for a mortgage
- ID and address verification: Having a copy of your passport or driving licence can verify your identity while utility bills or council tax statements can confirm your address
- DAS paperwork: Any paperwork related to your arrangement, such as payment history or creditor correspondence, should be readily available
What mortgages are available to me?
There are several different types of mortgage available and it’s important you choose the one best suited to your financial circumstances.
Here is a guide to the different types of mortgage you may be able to apply for on a DAS:
Fixed-rate mortgage
With a fixed-rate mortgage, your interest rate is locked in for a set period (typically two, three, five, or ten years).
Having a fixed-rate mortgage can provide a sense of stability as your monthly repayments will remain unaffected by market fluctuations and won’t change for the duration of the fixed-rate term.
They can, however, come with higher initial rates and penalty fees for early repayment.
Variable-rate mortgage
With a variable-rate mortgage, your interest rate can change based on the Bank of England’s base rate of interest or your lender’s Standard Variable Rate (SVR).
There are two main types of variable-rate mortgages: tracker mortgages (where your interest rate moves in line with the base rate plus a set margin) and SVR mortgages (where your interest rate moves in line with your lender’s standard rate).
Interest-only mortgage
With an interest-only mortgage, you only pay the monthly interest amount each month and the full loan amount is due at the end of the mortgage term.
This can be an attractive option if you want lower monthly payments, but you must have a plan in place to repay the capital when your term comes to an end and, as a result, it may not be an option if you’re on a DAS.
Repayment mortgage
With a repayment mortgage, you pay both the capital and interest each month and the mortgage will be fully repaid by the time the mortgage term comes to an end.
This will cost more per month over the loan’s lifetime compared to an interest-only mortgage, for example, but can give you the peace of mind that your mortgage is completely repaid as soon as you’ve made your final payment.
Are there any alternatives to a traditional mortgage?
Securing a traditional mortgage on a DAS can be challenging and you may want to consider the following alternatives:
Government schemes and support
There are various government schemes available to help you purchase a home while on a DAS.
For example, with shared ownership or shared equity, you can buy a share of a property (between 25% and 75%) and pay rent on the rest, which can later be increased through staircasing.
Non-traditional lenders
From credit unions to peer-to-peer lenders, non-traditional or specialist mortgage lenders tend to have more flexible lending criteria.
Because of this, a specialist mortgage broker is often recommended for those who have a DAS or have recently completed a DAS.
Can I include mortgage or rent arrears in my DAS?
Like most debt solutions, there are rules about which debts can and can’t be included in a DAS.
Generally, you should have no problem including all existing debts in a DAS, including personal loans, overdrafts, and credit cards, and you can usually choose whether to include rent or mortgage arrears.
However, you won’t be able to include secured debts, student loans, court fines, or Hire Purchase (HP) agreements, and may need to find another way to repay these debts while you’re on a DAS.
How can I protect my finances in the long term after a DAS?
Achieving financial stability after you’ve successfully completed a DAS requires careful planning – particularly if you’re considering a mortgage.
The following steps are vital to help you better manage your money and avoid future financial setbacks after a DAS:
Managing your mortgage repayments
Once you’ve secured a mortgage on a DAS, it’s important to tailor your budget to prioritise your mortgage repayments.
Having a consistent payment schedule not only protects your home investment but also helps you rebuild your credit score over time.
This can be done by automating your payments to ensure you never miss a due date and doing your research to understand how each payment affects your loan balance and interest.
Avoiding future debt issues
The key to maintaining good financial health post-DAS is making debt management a main component of your long-term financial plan.
By living within your means and saving for emergencies, you can reduce the need for additional credit and avoid falling into a cycle of debt.
Other steps you can take to avoid future debt problems include building an emergency fund, applying for credit cautiously, and dealing with priority debts first.
Conclusion
The process of getting a mortgage can be made more difficult by being on a DAS or having a DAS on your credit file, but it isn’t impossible. Generally, the better your credit rating, the better your chances of approval.
By doing your research and preparing your finances, you can improve your creditworthiness and lower your risk in the eyes of a lender.
Even after you get a mortgage on a DAS, it’s important to keep up with your repayments and take proactive steps to ensure you end up in a situation where you’re reliant on credit.
