How Australia’s debt addiction is making home buying harder

Jake Quade 28 April 2016

rock-island-123406_640Recent research has revealed that other everyday monetary commitments could be kneecapping your home loan borrowing power.

It can be easy to view a mortgage as separate to other common monetary commitments, but analysis has now put a monetary figure on the combined burden of having a car loan, credit card and/or personal loan while trying to secure a mortgage.

How much each type of debt is setting us back

The nation-wide survey found that Australians are lugging around an average of:

  • $16,320 per car loan, which reduces your effective borrowing capacity by $46,000
  • $12,643 per personal loan, which reduces borrowing capacity by a further $41,000
  • $3,114 per credit card, which reduces borrowing capacity by $12,000

These add up to a significant debt of $32,077, an amount that would reduce your borrowing capacity on a typical home loan by $99,000.

Which generations have the most reduced borrowing capacity?

The analysis reveals that debt is not evenly spread amongst age groups, with:

  • Gen Y carrying an average debt of $29,191, which reduces borrowing capacity by $97,000
  • Gen X carrying an average debt of $36,821, which reduces borrowing capacity by $121,000
  • Baby Boomers carrying an average debt of $129,000, which reduces borrowing capacity by $129,000

Getting debts in order is crucial

The average Australian house price already sits at $612,100, so having the amount that you can borrow handicapped due to a few other miscellaneous debts is not something many people may be able to afford, even though house prices have been rising more slowly recently. Having a sizeable home loan also allows you to consider rolling some of those existing debts into the mortgage, with mortgage rates generally being lower than other financial products.

It's also crucial to consider that the sooner you have debts knocked out of the way, you can focus wholly on building up a savings deposit – another factor that lenders take into serious consideration when you're applying for a home loan.

It can be very easy to exclude your mortgage from your "personal finance ecosystem", however the reality that all lenders and other institutions follow is that, like every other hefty financial commitment, a mortgage is simply one tool to better money management – one that can only be truly effective if you have your other monetary ducks in a row

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