Car leasing and Finance
There are a number of questions asked by many first-time car leasers. One of the most important ones is: “will leasing or financing a car affect buying a house?”.
So, let’s look at how car leasing (PCH) and financing (PCP) affect your mortgage application.
Does car leasing affect buying a house? How does leasing a car affect mortgage?
Lease payments are made up of two parts – a depreciation charge and a finance charge. The depreciation part of each monthly payment compensates the leasing company for the portion of the vehicle’s value that is lost during your lease. The finance part is interest on the money the lease company has tied up in the car while you’re driving it.
The main factor that is used all around the world in giving out mortgage deals is Debt To Income ratio (DTI). This is the amount of debt that you’ll be in after you sign the deal, divided by the amount of money you make. For example, paying £2000 in debt with an income of £4000 gets you a DTI of 50%.
As mentioned above, when you lease a car, you’re bound to make monthly payments until the end of the car lease term. When the car lease period ends, you’ll probably try to get another car lease deal or sort out vehicle finance.
If you get a house on a mortgage, you’ll be making an additional payment each month along with your ongoing lease deal. This increases your DTI and affects your credit score, so it will affect the terms and conditions of your mortgage deal. But why is that exactly?
You should know that leased cars also fall into the liability category, despite the many advantages that they bring. As a result, the payments that you make for them will be considered in your monthly DTI, which may result in you having to pay for a pricier mortgage deal, however, this is not always the case.
It is true that both having a place to live and car for transport are considered to be primitive needs and if you really cannot do without both of them, then it is recommended that you get yourself a cheap lease deal. Make sure you compare deals using our car leasing comparison tool.
There are some advantages of car leasing vs getting a car on finance (PCP) when it comes to getting a mortgage, we explain more below.
Does having a car on finance affect mortgage?
Loan payments also have two parts – a principal charge and a finance charge. The principal pays off the full vehicle purchase price, while the finance charge is loan interest. Since all vehicles depreciate in value by the same amount regardless of whether they’re leased or purchased, however, part of the principal charge of each loan payment can be considered as a depreciation charge. Just like with leasing, it’s money you never get back, even if you sell the vehicle in the future. Yes, financing a car, or getting a Personal Contract Purchase (PCP) can also be viewed skeptically by your mortgage provider. You’re making high monthly payments towards the loan, and your credit score is also affected.
But, does leasing a car affect a mortgage more than financing one?
Well, it depends on how much you’re paying. The higher the payment you make each month, the more effect it will have on the mortgage deal that you’re offered. This is where car leasing is a better option as the monthly lease payments are more likely to be lower, and, you won’t have a heft financial loan on your name.
This means that you’ll save a lot more money, which allows you to obtain a better mortgage deal. So, your mortgage provider will have enough trust in you to offer a less expensive and a shorter-term mortgage deal. You can see more pros and cons of leasing vs buying here.
It can be safely said that car lease and finance deals can potentially make your home ownership process a bit more difficult.
The key to remember when you’re looking to purchase a home and obtain a mortgage or refinance an existing mortgage is that, if you overspend on a vehicle, it affects your debt ratios and may restrict or negate your mortgage financing ability.
However, getting a good car lease deal is likely a better option rather than taking out a car finance loan (PCP) for the very same car.
Find Car Leasing Special Offers – Auto Lease Compare
Looking for the ideal car lease deal? Try Auto Lease Compare, to make your choice a lot easier. We’ll show you what the best leasing options are for your favourite car. Hence, you will be able to get lower monthly payments which can save you thousands.
Want to read more? Know more about why leasing is a better option than buying.