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What is a Debt Management Plan (DMP)?
A DMP is a repayment arrangement between a person and anyone they owe money to. It is put in place for so-called non-priority debts, such as credit cards, or mobile phone bills. "Essential" debts such as council tax, utility bills and rent cannot be included in a DMP. To be eligible for a DMP, you need to demonstrate that you can afford your essential monthly payments such as those mentioned above, with enough leftover for both day to day living costs and to pay into a payment plan.
A DMP practitioner will arrange the DMP for you. They will negotiate with any creditors to whom you owe money. Your monthly repayments will go to the DMP practitioner, who will then pay back the creditors on your behalf. Some DMP practitioners operate for free, others may charge an arrangement fee and/or monthly handling charge.
Because a DMP is an informal arrangement, the interest on the debt is not automatically frozen as it is with an Individual Voluntary Arrangement (IVA). This means it can take longer to pay back your debts, as the total debt owed may increase each month. DMPs are not legally binding, and they do not stop you from applying for further credit.
Can I get a mortgage with a debt management plan (DMP)?
Yes, although it will make it more difficult. Whether you are currently on a debt management plan (DMP) or have recently completed one, you may still be able to secure a mortgage for a new home, or remortgage your existing property.
You may be more likely to be accepted by specialist lenders, rather than high street banks.
What will a lender look at, if I apply for a mortgage with a DMP?
With any mortgage application, a lender will look at your income and outgoings, which would include a DMP. If you have a DMP in place, they may look at the rest of your credit history in greater detail, looking for any other signs of debt management problems. Many high street lenders will refuse an individual with a DMP outright, at least until six years after the debts have been satisfied. Being refused a mortgage application can put a further black mark on your credit history. For this reason, it’s essential to use a mortgage broker who can steer you towards specialist lenders that are more likely to accept your financial situation.
People with a DMP have generally experienced some kind of financial difficulties that led to them taking out a DMP in the first place. This may include missed or late payments on credit cards, for example. If enough time has passed and your repayment history has been clean since then, a lender may overlook historical issues like this. However, other debt management issues may be taken more seriously, such as IVAs, bankruptcy, or previous repossessions.
When a lender looks at your credit history with a DMP, the repayments to creditors may show up as underpayments, even though you are paying them back in line with a negotiated plan. It’s up to the creditor whether they report your lower repayments as defaults. This can show up as red flags when a lender runs a search on your credit history.
The other side of the coin is that a person slowly paying off a DMP is unlikely to have enough of a deposit to secure a good mortgage deal. If you have access to enough funds for a typical 15% deposit, you may be better off using these funds to pay back your current creditors, rather than applying for a mortgage.
Are there any positives to having a DMP?
On the plus side, if you have agreed to a DMP to manage your debts, it shows that you can take charge of your finances to climb out of debt. This will likely be looked on more favourably than someone who continues to default on payments, if that is the alternative.
Another potential positive is that if your monthly rent is very high, and monthly mortgage repayments will be much lower, the lender may recognise that this will improve the affordability of your outgoings. Similarly, if you are looking to remortgage while downsizing, a lender will take this into account.
How much can I borrow with a DMP in place?
This will depend on how long you have been paying back a DMP (or how long has passed since the agreement was satisfied). WIth a history of payment defaults, a lender may restrict a loan-to-value amount of 85%, meaning you would need a minimum 15% deposit.
Help-to-buy schemes allow individuals without large deposits to get a foot on the property ladder, but you’ll likely need three years to have passed since the completion of a DMP before you will be accepted.
Can I remortgage with a DMP?
Remortgaging can be a good strategy for people with a DMP, because it can allow you to release enough equity to clear or reduce your debts. However, any decision like this should not be taken lightly.
Just because you currently have a mortgage does not mean your current lender will automatically approve you for a remortgage. They will look at your current financial situation for any fresh application, including how much debt you owe with a DMP. The higher a percentage of your home that you own, the more likely a lender will consider your application. You will own a higher proportion of your home if a) you have lived in your home for many years, and therefore have made many years of mortgage repayments and/or b) the value of your home has increased since you bought it.
A lender is likely to release equity up to a loan-to-value ratio of 80-85%. So if you currently own 50% of your home, you may be able to remortgage to release the difference in equity (i.e. up to 30-35% of the value of your home). However, if you only own 20% of your home, you are unlikely to be accepted.
What if I have already settled a DMP?
Although a debt management plan itself won’t show on your credit file, missed payments and accounts in arrears will. These details stay on your credit file for six years. Within the first six years of completing a DMP you may find that high street lenders are not willing to lend to you.
Whether six years have passed or not, it’s critical to review your credit history and review how any debts are showing up. If debts have been settled but are still showing as outstanding, write to the companies and request that they change the status of these payments. They may not do so, but it’s worth asking. If any other details are incorrect, write to the companies and copy in the credit agency.
As with anyone preparing to apply for a mortgage, showing that you can regularly pay off debt can be a good technique to improve your credit history, such as by paying off a credit card by direct debit each month.
After six years, you should be considered equal to any other applicant.
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If I haven’t yet settled my DMP, does it matter how long ago it was set up?
Yes. It depends on the lender, but in general even specialist lenders will want to see at least twelve months of successfully paying off a DMP to consider a mortgage application. Even after twelve months, it’s likely you’ll be offered much higher interest rates.
You’ll need to speak with a broker, who can put you in touch with specialist lenders.
Do I need to have made repayments on time?
Yes. Not making payments on time is a sign of struggling with debt management, which lenders will see as a warning sign when considering you for a mortgage.
If you’re struggling to make other payments because of your DMP, talk to your practitioner. It’s their job to ensure you have enough funds to live and survive. They may be able to negotiate your debt further.
Choosing an Adviser
Selecting a qualified and experienced mortgage adviser is of great importance. To choose a suitable adviser, evaluate their qualifications, experience, and reputation, and ensure they are regulated by the Financial Conduct Authority (FCA).
Read reviews from previous clients and make sure they provide a clear explanation of the products and services they offer, as well as the fees and charges associated with them.
Last updated 28 February 2024