Purchasing a new car on finance might seem like a routine decision, but it can have unintended financial consequences, particularly for those looking to buy a home or remortgage.
What many buyers may not realise is that monthly car finance payments can significantly impact how much a lender is willing to offer for a mortgage.
This is Money reports that new research from Coventry Building Society reveals just how much a personal contract purchase (PCP) agreement can reduce mortgage borrowing power.
With affordability checks playing a crucial role in determining loan amounts, the choice to finance a vehicle could mean securing a smaller mortgage, delaying homeownership, or limiting property options.
How Much Can a Car Finance Agreement Reduce Mortgage Borrowing?
Coventry Building Society analysed affordability assessments from the 10 largest UK lenders and calculated the impact of car finance agreements on mortgage borrowing.
For instance, financing a Ford Puma, which was the UK’s most popular car in 2024, with a monthly PCP payment of £345 over 36 months—based on a recent offer available on Ford’s website—could reduce a single buyer’s mortgage borrowing by £18,423.
For joint buyers, if both had similar car finance agreements, their mortgage borrowing capacity could decrease by £13,205 each.
Similarly, financing a Kia Sportage, the UK’s second most popular car in 2023, with a monthly PCP payment of £397 could reduce a single buyer’s mortgage borrowing by £24,548. For joint buyers, each taking on such a car finance agreement could see their borrowing capacity decrease by £20,611.
These figures highlight the potential trade-off between vehicle financing and securing a larger mortgage. Buyers may need to opt for a smaller home, delay purchasing, or save for a larger deposit to compensate for the reduction in borrowing capacity.
Why Lenders Factor in Car Finance Agreements
Lenders assess mortgage applications based on affordability checks. Most borrowers are restricted to taking out a mortgage worth no more than 4.5 times their gross annual salary. For example, an individual 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.
Jonathan Stinton, head of mortgage relations at Coventry Building Society, emphasised that buyers should carefully consider the implications:
“Going to buy a brand-new car can be exciting, but before signing the deal, it’s worth knowing what the extra outgoing can mean for your mortgage. Even if you don’t have immediate plans to move, it’s worth remembering that when it comes to remortgaging, lenders still need to make sure your mortgage is affordable.”
Mortgage Rates and Financial Considerations
The impact of car finance on mortgage borrowing is particularly relevant at a time when mortgage rates have risen significantly in recent years.
Higher borrowing costs mean that homebuyers and those remortgaging must be even more cautious about fixed financial commitments, such as car finance agreements.
For those looking to secure the best mortgage rate, financial experts recommend using mortgage comparison tools to explore available options. Websites like This is Money, in partnership with L&C Mortgages, offer mortgage calculators to compare fixed-rate deals from various lenders.
What This Means for Homebuyers and Remortgaging
For prospective homebuyers, taking on a car finance agreement could result in a smaller mortgage approval, limiting their property options. It might also lead to delayed homeownership, as buyers may need to save more to offset the reduction in borrowing capacity.
Additionally, it could create complications when remortgaging, since lenders reassess affordability based on fixed financial commitments.
Those planning to buy a home or remortgage should carefully evaluate whether a new car purchase aligns with their long-term financial goals.
If maximising mortgage borrowing power is a priority, postponing a PCP agreement or considering alternative financing options with a lower monthly impact may be advisable.
