HECS debts, credit cards, car loans and personal loans can all reduce how much you can borrow for a home loan. That’s because lenders don’t just look at your income. They also look at your existing debts and financial commitments to work out how much of that income is available to repay a mortgage.
And sometimes, the impact can be much bigger than people expect.
You might have a good income, consistent savings and no trouble whatsoever managing your current repayments, but still find the bank will lend you considerably less than you thought.
Here’s how the different debts can affect your borrowing capacity, and what you should consider before applying for a home loan.
Watch: How your existing debts affect your borrowing capacity. Trilogy Funding mortgage broker Rhienne Szabo breaks down how HECS, credit cards, car loans and personal loans can affect how much you may be able to borrow.
Does HECS affect your borrowing capacity?
Yes. Having a HECS debt can reduce your home loan borrowing capacity.
HECS repayments are generally withheld from your pay through the tax system, which means it’s easy to forget about them when you’re working out what you can afford.
A lender won’t forget about them.
When assessing your home loan application, lenders consider the impact of your HECS repayments on the income you have available to service a mortgage.
That doesn’t mean having HECS prevents you from buying a home, or that you should automatically pay your HECS debt off before applying.
It simply means it needs to be included when working out your borrowing capacity.
If you’re still studying or have recently finished university, it’s worth knowing this before you set your property budget.
Does a credit card with a $0 balance affect borrowing capacity?
Yes. A credit card can affect your borrowing capacity even when you don’t owe anything on it.
This is one of the things that catches buyers out most often.
You might have a credit card with a $10,000 limit and a balance of $0. From your perspective, you don’t have $10,000 of credit card debt.
But lenders generally assess the credit limit available to you, rather than simply looking at the amount you’ve spent on the card today.
That’s because you could potentially use that available credit after your home loan is approved.
I regularly see people with cards they’ve had sitting around for years “just in case”, or high limits they’ve kept for emergencies or frequent flyer points.
If you don’t actually need that available credit, reducing your limit or closing an unused card may improve your borrowing position.
Personally, if you don’t need it, I’d put it straight in the bin.
How does a car loan affect your borrowing capacity?
A car loan can reduce your borrowing capacity because its regular repayments reduce the income you have available to service a home loan.
You might be comfortably paying a few hundred dollars a fortnight towards your car and barely think about it.
The lender does.
Those repayments are an existing financial commitment, so they’re taken into account when assessing what you can afford to repay on a mortgage.
This is particularly important if you’re considering financing a new car shortly before buying a home.
Having a new car is exciting. But you know what’s more exciting? Buying your own house first.
If buying property is the priority, find out what taking on the car loan could do to your borrowing capacity before signing the finance contract.
Do personal loans affect how much you can borrow?
Yes. Personal loan repayments are another existing commitment that can reduce your home loan borrowing capacity.
The impact will depend on factors including the size of the loan, your repayments, your income, your other commitments and the lender assessing your application.
A personal loan doesn’t automatically mean you can’t get a mortgage.
It simply means there’s less of your income available for the lender to allocate towards home loan repayments.
Why do debts make such a difference?
We like to explain borrowing capacity using a pizza.
Imagine your income is a pizza with eight slices.
Before a lender even gets to your proposed mortgage, slices may already be allocated to your car loan, personal loan, credit card commitments, HECS and living expenses.
The lender has to work with what’s left.
That’s why someone can earn a good income and comfortably manage their day-to-day finances but still be surprised by their maximum borrowing capacity.
The issue isn’t necessarily that you’re managing your money badly. It’s that the lender has to assess all of your existing commitments when deciding how much additional debt you can afford.
Should you pay off your debts before applying for a home loan?
Not necessarily.
This is where you should be careful about following generic advice.
Closing an unused credit card or reducing an unnecessarily high limit might make sense. In other circumstances, paying out a particular debt before applying could improve your borrowing position.
But that doesn’t mean everyone should start throwing their savings at HECS, car loans and personal loans before speaking to a broker.
The best strategy depends on your individual numbers and what you’re trying to buy.
Sometimes the numbers already work with your existing debts.
Sometimes dealing with one particular liability can make a meaningful difference.
And sometimes it makes more sense to keep your savings and adjust your property budget instead.
Find out which situation you’re actually in before moving money around.
Can you get a home loan if you already have debt?
Yes. You can still qualify for a home loan if you have HECS, credit cards, car finance, personal loans or other debts.
Having debt isn’t an automatic deal-breaker.
What matters is whether your income, expenses and existing financial commitments leave you with enough borrowing capacity for the home loan you’re seeking, and whether you meet the lender’s other requirements.
That’s why two people earning exactly the same salary can have very different borrowing capacities.
Their financial commitments may be completely different.
What should you do before applying for a home loan?
If you’re planning to buy, take a look at all of your existing debts and credit facilities, including the ones you barely think about anymore.
Check the limits on credit cards you don’t use. Think carefully before applying for new finance. Make sure your HECS debt is factored into your calculations. And ideally, establish your borrowing capacity before you start making major financial decisions or seriously looking at properties.
Most importantly, don’t assume you need to eliminate every debt before you can buy a home.
The better question is:
What can I comfortably borrow with the debts I have now, and would changing any of them materially improve my position?
Once you know that, you can make decisions based on your actual numbers rather than guessing.
Want to know what your debts are doing to your borrowing capacity?
You don’t necessarily need to pay off your HECS, close every credit card or clear your car loan before buying a home. What matters is understanding how those debts affect your numbers.
In a free 30-minute Strategy Session, we’ll look at your current position, what you may be able to borrow, and whether making any changes before you apply could put you in a better position.
Sometimes the numbers already work. Sometimes a relatively small change can make a meaningful difference.
Either way, you’ll know where you stand.
Book your free 30-minute finance strategy session and let’s run the numbers.
About the Author
Since 2008, David Thomas has built a business aimed at servicing the needs of property investors, owner occupiers and small business owners. David is recognised as one of the top 10 independent mortgage brokerages in the country, David and his team have settled almost billions of dollars worth of residential and investment loans over the last decade.
Known for his straightforward, relatable style, David believes by educating people about property funding; they fare better in the market. By sharing his expertise openly, some of the people he educates will likely become his clients. It's a win-win approach.
David Thomas is a credit representative (Representative Number 506153) of BLSSA Pty Ltd, ACN 117 651 760 (Australian Credit Licence 391237).