When it comes to applying for a home loan, your borrowing power is an important consideration. This refers to the amount of money a lender is willing to loan you based on your financial situation. Many factors can influence your borrowing power, including your credit score, income, and debts. In this blog, we will look at different types of debts and how they can impact your borrowing power when applying for a home loan.
Car Loan
Secured car loans usually offer lower interest rates than unsecured personal loans 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.
Some potential borrowers wonder if they should pay off their car loan prior to purchasing a home. The answer to this depends on how much of a deposit you have. It may be necessary to reduce or cancel the car loan in order to achieve the approval amount you require on a home 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.
Personal Loan
Personal loan debt reduces the amount of income you have available to service a home loan which potentially lowers your borrowing capacity. Personal loans generally have higher interest rates attached to them. If a variable interest rate is attached to your loan, lenders may also add on a buffer to allow for future interest rate rises.
Credit Cards
You may often hear people say that credit cards will help improve your credit rating. However, only responsible credit card usage will improve your rating. Using credit cards responsibly prove to lenders that you are a reliable low risk borrower.
However, having multiple cards with high borrowing limits may raise red flags for lenders when assessing your finances. Sometimes it is necessary to cancel or reduce limits on your cards in order to achieve the approval amount that you require.
Buy Now, Pay Later Services
Buy now pay later services such as Afterpay can impact your borrowing capacity if a lender determines that you rely too heavily on short term credit. This could negatively impact your mortgage application and reduce your borrowing power.
If the amount of debt on these services does not affect your ability to make home loan repayments and you have not been late or missed payments then using these services should not impact your application.
Student Debt
HELP/HECS debt can have an impact on a person’s borrowing power. This is because lenders will take into account a person’s total debt-to-income ratio when determining how much they can borrow. HELP debt will be included in this calculation, which can potentially reduce a person’s borrowing power.
It is important to note that HELP debt is not a major concern for most borrowers. Lenders typically do not require borrowers to pay off their HELP debt before they can qualify for a mortgage. However, borrowers with large HELP debts may find it more difficult to qualify for a mortgage, or may need to make a larger deposit to qualify for a loan.
Existing Mortgage
Your existing mortgage is debt which means it must be accounted for when lenders assess your financial situation. However, if you have 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. Furthermore, any income from investment properties could increase your borrowing capacity and help your loan application.
We’re here to help
It is important to understand how these debts can affect your financial situation and to work on paying down debt and improving your credit score to increase your borrowing power. If you have any questions about your borrowing power, get in contact with our team today to see how any debts you have could impact your borrowing power.
