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Buying a home

What kind of debt can impact getting a home loan?

18 November 2019

Not all debts were made equal. When it comes to buying a house, some debts can be helpful and some, well, we could really do without. Let's take a look at the different types of debt and how they might affect your home loan borrowing capacity.

Personal loan debt

Personal loan debt reduces the amount of income you have to service a home loan, in turn potentially lowering your borrowing capacity. Personal loans also often have higher interest rates. If a variable interest rate is attached to your loan, lenders may also add on a buffer to allow for future interest rate rises.

Car loan debt

Apart from a home, a car is likely to be one of the single biggest purchases you make. Because of this, a car loan can often be a convenient solution. For Suncorp Bank Secured Car Loans, we use the vehicle you’re buying as security for the loan. Secured loans usually offer lower interest rates than loans that are unsecured as the loan represents a lower risk to the lender. This means that while a secured car loan will still affect your borrowing capacity, it might not have as big an impact as an unsecured personal loan.

On the flip side of this, a fully paid off car loan can help your application. Demonstrating you were able to always make your car loan repayments on time could make your home loan application stronger.

Student debt

Your income versus your expenses forms a big part of the home loan application assessment. Unlike most debts, student debt affects the income side of the equation. As at 1 July 2019, once the minimum repayment income threshold is met, the repayment rates start at 1% of your income and increase as you earn more, up to a maximum of 10% of your income. How much you earn determines how much you pay back, and in turn, the effect this debt has on your borrowing capacity. Various lenders may assess student debt differently, but regardless of how they choose to treat it, student debt is likely to have some impact on your borrowing power.

Existing mortgage

If you already own a home – congratulations! This is such a wonderful achievement. Although buying your first home could have left you with a sizable amount of debt, it’s not all bad news! If you've lived in your home for some time you may be able to tap into your equity to produce a larger deposit for your second property. Any income from investment properties could increase your borrowing capacity and help your loan application.

Credit card debt

Credit card debt can be quite confusing, and there’s a lot of conflicting advice around its effect on getting a home loan.

It’s common to hear that credit cards will help improve your credit rating. While not a total myth, a more accurate statement would be that credit cards can help improve your credit rating – if you’re responsible. Using credit cards responsibly can help demonstrate to lenders you’re a reliable, low-risk borrower. How you pay other recurring expenses, such as phone bills and even gym memberships, may also contribute to your credit rating. For more information on credit ratings and to learn how you can get a free copy of yours, visit ASIC’s Money Smart website.

Lenders don’t just look at your credit card balances and repayments. What’s also important to them is the credit limit of each card. If you have multiple credit cards and think this could affect your borrowing power, it might be a good idea to speak to a lender and discuss closing some card accounts or lowering their limits to see if this will help your home loan application.

Buy now, pay later

With the recent rise in the online ‘buy now, pay later’ industry, having accounts with services like Afterpay and Zip Pay are making it easier for us to spend big. But at what cost? We’ve previously talked about the Royal Commission and how your spending habits can affect your chances of getting a home loan more than ever before. Seemingly small spending decisions (made even smaller by four easy payments!) could make a big difference to your borrowing capacity when it comes time for a lender to look at your expenses against your income. In some cases, lenders may even want you to cancel your lay-by accounts and provide proof of this. But even if they don’t, not having the option to Afterpay something might just be the help you need to build your deposit faster. After all, do you really need that new pair of shoes?

Shared debt

If you’ve taken out a loan with someone else this makes you a co-borrower, and to most lenders you and your co-borrower are both jointly and individually liable for the debt. This means that if the other person was unable to repay the loan, you’re then fully responsible for the outstanding balance (and vice versa). This doesn’t matter if the person you share the loan with will also be on the home loan. But if they’re not, that debt is considered all yours and this could significantly affect your borrowing capacity. If you’re in this situation and want to improve your borrowing capacity, some lenders might be willing to only take into account your share of the debt if you can provide proof the other co-borrower can pay theirs.

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Information is intended to be of a general nature only and any advice has been prepared without taking into account any person's particular objectives, financial situation or needs. You should make your own enquiries, consider whether advice is appropriate for you and read the relevant Product Disclosure Statement or Product Information Document before making any decisions about whether to acquire a product.

Banking products are issued by Suncorp-Metway Ltd (“Suncorp Bank”) ABN 66 010 831 722 AFSL No 229882. Please read the Product Information Document for Personal Deposit Accounts before opening an account. Fees, charges, terms and conditions apply and are available on request.

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