Will My Debts Make It Harder to Get A Loan?
Many of us live with some sort of debt and home buyers often ask us if their existing debt will affect their home loan approval. Our answer is usually: let’s look at what debt you have and how it will affect your borrowing power. Read on for an overview of borrowing power and what will (and won’t) affect your ability to get a loan.
What is borrowing power?
Borrowing power is a term used to describe how much you can afford to borrow from a lender. Lenders use calculations based on your financial situation to decide exactly how much you are likely to be able to repay on a loan. A number of factors will impact your borrowing power.
For an increased borrowing power, you may show evidence of:
- Large deposit
- Low debt
- Valuable assets
- “Reasonable” living expenses
- Stable employment
- A high income – compared to how much you want to borrow
Some factors that may decrease your borrowing power include:
- A bad credit history or score
- A low deposit
- High expenses compared to your income
- “Too much” debt to comfortably service another loan
What types of debt can impact a home loan approval?
Let’s take a look at the different types of debt you may have as a Brisbane home buyer and how likely it will affect your borrowing power and ability to get a loan.
Student debt in Australia – is it a barrier to get a loan?
Many first home buyers will have some level of student debt. The good news is that although it can impact your borrowing power, it generally is not a significant barrier to getting approved for a home loan.
Some lenders will treat your student debts as a regular debt (as they would a personal or car loan), however, if the rest of your application is strong, including having a stable income and healthy credit rating than a typical student debt should not affect your approval chances.
NOTE: In the past HECS or HELP debt were not included in Debt to Income (DTI) ratios. Now they are. DTI is capped at 6x your income – and if your HELP debt is like $50K – that comes off your total loan amount. Some lenders are harder on this DTI than others.
An experienced mortgage broker will assess your financial situation to advise you if your student debt combined with other debt could be a risk.
Personal loans – how do lenders assess personal debt?
Personal loans are assessed as an expense that will impact your ability to repay your home loan each month. This calculation will reduce your borrowing power when it is weighed against your income. If your debt to income ratio is too high, it can impact your ability to get approval for a home loan.
When it comes to personal loans, they generally attract higher interest rates, so a lender will factor in whether it is a variable or fixed interest rate and whether it is a secured or unsecured loan when assessing how much they will lend you for your home loan.
No matter where you are on your home-buying journey, a mortgage broker can advise you on short and long term actions you can take to better your chance at a home loan approval.
Credit cards – do you need to pay them off before getting a home loan?
Credit cards can affect your borrowing power in more ways than one. You may have no debt on your credit card, or you may pay it off every month, but some lenders assess the credit card limit as your “potential debt”. This can put you in the NOT APPROVED basket before you even begin your home loan application depending on other debt you may have.
So how does this work? Let’s say you have a credit card with a $5000 limit. You have the potential to borrow that amount, so the lender may count that as a potential debt of $5000 for your expenses. If you don’t need your credit cards, it can be a really good idea to pay them off and cancel them before you start your mortgage application. If you want to keep a credit card, you can lower the limit so your borrowing power is less impacted.
Is there any debt that can be helpful to getting a loan?
Do you already have a home loan? We often get asked if owing money on an existing mortgage will mean you cannot get another home loan. If your loan to value ratio (LVR) is healthy, you may be able to access equity to increase your chances of approval for another home loan. There are a number of ways already owning property can actually increase your borrowing power. Working with a mortgage broker is a great first step to get yourself in the best financial shape when you want to increase your real estate portfolio.
Having debt to your name does not mean you cannot afford to buy a home.
However, it is important to understand what debt you have and how it will impact your borrowing power before you start making offers on your dream property.
Contact us today for a financial health check tailored just for you and get you home loan ready.