Does a car loan affect your mortgage application?

Why does having a car loan affect my borrowing power?

Your borrowing power determines how much a lender will comfortably lend you. To assess your repayment capabilities, lenders will review your income and assets in relation to your debts and other ongoing expenses.

Having an outstanding car loan reduces your borrowing power because it's a debt you have to repay. So your lender factors in your car loan repayments when assessing how much you can afford to borrow for a home loan.

"Car loan repayments reduce the amount of income left to service a new home loan," explains Thomas Lynch, finance specialist with Step One Finance. "In other words, they reduce your disposable income and directly influence how much you can borrow to buy a home."

Will a car loan stop me getting a home loan?

For most borrowers, a car loan itself won't be enough to stop you from getting a home loan. But an outstanding debt could stop you getting the full amount of finance you need.

And then you'd have to contribute a bigger deposit, approach a new lender or look for a cheaper property.

"Car loans will reduce affordability," Lynch says. "Each bank has different assessment criteria and policy when looking at an individual's ability to repay a loan. It's not uncommon to find some lenders will offer a more favourable servicing policy than others, and those who do have car loans and want to borrow more will find it useful to shop around."

What if your car loan is stopping you getting a mortgage?

Let's say your car loan is the reason your home loan application was rejected. Or the lender lowered the loan amount you'd qualify for and now you can't afford to buy the property you were looking at.

There are a few things you can do:

1. Focus on repaying the car loan faster. Look at your spending and try to find ways to cut down so you can devote more money to your car loan (most car loans let you make extra repayments). Even if you don't repay the loan fully a smaller loan will have a smaller impact on your borrowing power.
2. Consider refinancing the car loan. If your car loan has a high interest rate and big monthly fees you might want to refinance the car loan and switch to a better deal.
3. Give it time. If you're making repayments to your loan each month then over time your loan will shrink and your borrowing power may improve.
4. Improve your overall borrowing position. If the car loan isn't the only thing dragging your application down, or you aren't able to repay it any faster, then there are other steps you can take to improve your chance of approval (we explain these in the next section).

Tips for improving your chance of approval

Lenders assess your entire financial position, not just your car loan. There are obvious ways to improve your chances of getting a home loan approved, like saving a bigger deposit or buying a cheaper place.

But there are other, more practical steps you can take to improve your borrowing power:

1. Pay off other debts. There's a general hierarchy when it comes to debts and borrowing power. Focus on higher interest debts first. A car loan will be one of the most urgent ones, but if you have unpaid credit card debt it probably has an even higher interest rate.
2. Lower your credit limit. Even if your credit card spending is under control, lowering the limit on your credit card also boosts your chances of success. If you have multiple credit cards consider cutting down to one.
3. Check your credit score. You might find missed payments, defaults or other issues affecting your creditworthiness. Or you may find errors on your report. Make the late payments or get the errors removed and your score should improve. You can check your credit score for free through Finder.
4. Find ways to cut back. Review your spending and check where your money really goes each month. Spending less in the few months before you apply will help your chances of approval (and you should be doing this anyway to find more money to pay off your car loan).

Frequently asked questions

• Does getting a car loan affect getting a house loan?

  Yes, getting a car loan can affect your ability to secure a house loan. A car loan increases your total debt, which may reduce your borrowing capacity and influence your home loan approval.

• Does a car loan affect your credit score?

  A car loan can impact your credit score both positively and negatively. Regular payments can improve your score, while missed payments can hurt it.

• How much will a car loan affect my borrowing power?

  A car loan reduces your borrowing power as lenders consider it a financial liability. The exact impact depends on the loan amount and your financial situation, but as a general guide, every $5,000 of debt reduces your borrowing power by $25,000.

• Can I get a home loan if I have a personal loan?

  Yes, you can still get a home loan if you have a personal loan, but it might reduce your borrowing capacity. Lenders will assess your overall debt and income when determining your eligibility. It's estimated that every $5,000 worth of debt, such as personal loans or credit cards, reduces your borrowing capacity by $25k.

Written by

Richard Whitten

Senior Money Editor

Richard Whitten is Finder’s Senior Money Editor, with over eight years of experience in home loans, property, credit cards and personal finance. His insights appear in top media outlets like Yahoo Finance, Money Magazine, and the Herald Sun, and he frequently offers expert commentary on television and radio, helping Australians navigate mortgages and property ownership. Richard started his career in education and textbook publishing in South Korea. He holds multiple industry certifications, including a Certificate IV in Mortgage Broking (RG 206) and Tier 1 and Tier 2 certifications (RG 146), as well as a Bachelor of Education from the University of Sydney and a Graduate Certificate in Communications from Deakin University. See full bio

Richard's expertise

Richard has written 663 Finder guides across topics including:

• Home loans
• Credit cards
• Personal finance
• Money-saving tips