Buying a house while in a Debt Management Plan (DMP)
Managing debt responsibly is always viewed more positively than ignoring the problem. That was exactly the position our clients found themselves in when they approached us about buying a new home.
They were looking to move to a larger property to accommodate their growing family. However, one applicant had previously experienced financial difficulty and sought help from a registered debt management charity. A formal Debt Management Plan was put in place, with a structured household budget and reduced, proportionate payments agreed with each creditor.
While this was absolutely the right step financially, the short-term impact on the credit file was significant. Several accounts had fallen up to six months into arrears before the DMP began, and some were recorded as defaults. While formal Debt Management Plans arranged through authorised charities are viewed more favourably than informal arrangements, this level of adverse history typically rules out high street lending and requires consideration from an adverse credit mortgage provider.
The key factor in this case was that the Debt Management Plan had been completed in full. The 24-month arrangement had just finished, and all included debts were now fully satisfied. Importantly, it had been administered by an authorised charity, which lenders generally view more favourably than informal arrangements.
Buying a house while in a Debt Management Plan – or shortly after completing one – requires careful lender selection. Some lenders take a blanket approach to adverse credit, while specialist lenders assess the context: Was the debt managed responsibly? Has the situation been resolved? Is current affordability strong?
We approached a specialist adverse lender and secured a 2-year fixed rate with Kensington at 5.36%, with no arrangement fee.
Loan amount: £198,500
65% loan to value
25-year term
Monthly payment £1,202
The lower loan-to-value was an important strength in the application, demonstrating reduced risk to the lender. Affordability was strong, and with the DMP completed and debts settled, the case met criteria immediately.
The clients were able to proceed with their house move, securing a property that gave them the additional space they needed. While the interest rate was higher than standard high street pricing, the 2-year fixed term was deliberately chosen as a stepping stone, effectively acting as a credit repair mortgage.
Four years on from the original credit issues, the expectation is that their profile will align much more closely with mainstream lending criteria. At that point, they should be well positioned to refinance onto more typical high street rates.
Debt problems do not have to mean the end of homeownership plans. In many cases, lenders are far more concerned with how the situation was handled than the fact it happened at all. Structured advice, complete arrangements and a clear recovery path can make all the difference.
As always, every client’s circumstances are unique, and lender criteria change regularly. If you are considering buying a house while in a Debt Management Plan, or shortly after completing one, seeking specialist advice early can significantly improve your options.
