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When you apply for a home loan, you’ll need to provide a wide range of information about your financial situation to your lender. As well as your employment, your income and any assets you own, you also need to tell the bank about your liabilities and ongoing expenses.
The lender wants to determine whether you will be able to afford to make repayments on the loan, and if you have too much debt to repay, then there’s a risk your mortgage application will be rejected.
One factor that may affect your borrowing capacity is a car loan. While borrowing money to purchase a vehicle may seem like a convenient solution, it can also have a significant impact on your ability to qualify for a home loan.
Each lender has a set of lending criteria which borrowers must satisfy in order to qualify for a home loan. The aim of these criteria is to minimise the risk to the lender – in other words, they want to be as confident as possible that you will be able to repay the loan and that you won’t default on the mortgage.
In order to assess your repayment capabilities, lenders will review your income and assets in relation to your debts and other ongoing expenses. This is known as your debt-to-income ratio, and owing money on a car loan can have a significant impact on your ability to qualify for a mortgage.
“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 or investment property.”
In many cases, a car loan itself won’t be enough to stop you qualifying to borrow money to buy a home, but it could be the difference between achieving your desired level of borrowing and falling short. And if you can’t access the finance you need, you’ll have to broaden your search for properties and start looking at homes in a lower price range.
“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 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.
“From my experience, I have seen car loans ranging from $400 per month to over $1,000 per month. If you are planning to buy a home, it’s best to borrow as little as possible for a car and therefore keep these payments to a minimum,” he says.
Paul Smith is 32 years old and planning to buy his first home. He earns $60,000 pa working as a business consultant. He has no partner or dependents, one credit card with a limit of $5,000, cleared every month, and recently took out a car loan of $30,000 with repayments of $608 per month over five years. Paul’s monthly living expenses are $1,800.
He has been able to save $50,000 to put towards his first home.
Based on this scenario, Paul’s maximum borrowing power with a big four lender is $211,000.
If Paul did not have a car loan, his maximum borrowings would be $301,000, an additional $90,000.
Note: The borrowing power can differ with each lending institution and approval is subject to the overall strengths of the application. The assessment rate used is 7.25% pa.
Thomas Lynch from Step One Finance says that banks will generally offer home loan finance based on the following three questions:
Image: Shutterstock
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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