Does a car loan affect your mortgage application?
A car loan will reduce your borrowing power when you apply for a home loan. But it doesn't have to be a dealbreaker.
Key takeaways
- When you apply for a home loan, your lender assesses your income, spending, credit score and your debts. This includes any car loans.
- Having a car loan won't necessarily be a problem for your home loan application, but any outstanding debt can reduce your borrowing power.
- You can focus on paying the car loan down before you apply, but you can boost your borrowing power in other ways too.
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."
The average home and car loan size
The average Australian home loan is $659,920, according to ABS statistics. And the average Australian car loan is $12,035 according to Finder's Consumer Sentiment Tracker. While this is a significant sum that will impact your borrowing power, it won't necessarily ruin your chances of getting a home loan.
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:
- 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.
- 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.
- 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.
- 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:
- 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.
- 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.
- 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.
- 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
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Hello i have had bad credit but got a loan to buy a car to show that i can pay and get my credit good again but i rent a house and pay child support i have a full time job for 8 years now prob make between 55 and 64 000 a year but seem to be paying alot of money for nothing and would rather be paying a house of for myself so i can see where my money s going i dont have much in savings but would like to know if i could refinance my car loan and get a house loan and pay one payment is this possible
Hi Jason,
Thanks for your inquiry
I’m afraid it is not possible to combine your car loan and home loan into one payment. Ultimately, the decision comes down to you. If you’d rather be free of debt sooner and are willing to forego a few extra bucks by doing so, pay off your smallest loan first, which is likely your auto loan.
Hope this information helps
Cheers,
Arnold
I want to take a car loan on my father and emi paid by me as i am not directly eligible for the loan on me. My father want to take a house loan.. does our car loan affect house loan amount .. i kw it does.. but as emi’s are paid by me..will there be any chance for full eligibility
Hi Lokesh,
Thanks for your question.
Each lender has their own set of lending criteria which borrowers must meet in order to qualify for a home loan. Generally, they will assess your serviceability by looking at your assets, income and even other liabilities. In the event that may still consider your home loan even if you still have a current car loan, it will most likely affect and reduce your expected home loan amount. I would suggest that you contact the lender first and discuss your loan options with them.
Cheers,
May