Types of debt that can impact your home loan application
When you apply for a home loan, your prospective lender will look at the debt that you already have so they can assess your capacity to service the new loan. To understand how this may affect your application, it is important to understand what lenders classify as debt, and what approach you can take to increase your chances of getting approved for the loan you want.
Here are some typical types of debt that can impact your home loan application:
If you already have a home loan on the property you are living in, the lender will need to know whether you intend to discharge that loan and live in the new residence you are buying. If that’s the case, then the lender won’t need to consider the costs of servicing that loan.
However, if you are buying an investment property, or you are planning on keeping your current residence as an investment property, the lender will need to factor the costs of servicing that loan when assessing your borrowing capacity. This will also apply if you already own an investment property that has a loan against it, and the bank will consider the income you receive as part of your application.
Lenders will look upon a car loan as an expense that reduces the income you may have to service a new home loan. While having a car loan probably won’t prevent you from getting approved, it may reduce the size of the home loan you are trying to get.
When it comes to credit cards, lenders may not look at whether you pay your credit cards off in full every month, or even how much you owe. Lenders will look at your total credit limit across all cards, and the higher it is, the lower your borrowing capacity could be. The lender will need to assume that you might potentially end up owing the total limit on your credit cards, and this could be considered when deciding how much you can borrow.
If you have more credit cards than you need, you may want to consider cancelling them or reducing the credit limits to the minimum you need. Read more to get credit card tips to help your home loan application look more desirable to a lender.
If you have a HELP (formerly HECS) debt, this could affect how much you can borrow. Even though it won’t attract interest, a HELP debt can be seen as a liability, decreasing the amount of your income that you can put towards your home loan by 1% for people on $45,881 per year, to 10% for people over earning $134,573 and above.
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