When you apply for a home loan, you'll need to provide a wide range of information about your financial situation to your lender. Apart from your employment, income and any assets you own, you also need to tell the bank about your liabilities and ongoing expenses.

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.

Why does having a car loan affect my mortgage application?

Each lender has a set of lending criteria which borrowers must satisfy 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.

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. 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."

Can a car loan reduce the amount I can borrow?

In many cases, a car loan itself won't be enough to stop you from 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 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.

"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.

What factors do lenders assess in the home loan application process?

Thomas Lynch from Step One Finance says that banks will generally offer home loan finance based on the following 3 questions:

• Can you pay (income less expenses)? "The more disposable income, the better position you will be in to apply for finance. A car loan will reduce your disposable income and therefore your borrowing capability," he says.
• Will you pay (credit history)? "Have you shown good conduct on previous and existing loans such as credit cards, car loans, personal loans and even mobile phone bills?" Lynch asks. "This is becoming less of a problem as there is a range of lending institutions who will cater to people with adverse credit reports and low scores. If you want to attract the best possible deal, it's a no-brainer to keep your credit score as healthy as possible."
• What will the bank do if you can't repay (sell your property offered as security)? This is based on your net worth or total assets less your total liabilities. "If you are contributing a large amount of cash or equity to a property purchase then this is considered less risk to the bank and you will have a better chance of loan approval and attract a more competitive offer," Lynch explains.

Tips for improving your chance of approval

• Pay off your debts. While an outstanding car loan can hurt your borrowing power, a car loan that you have fully paid off can help your application. If you can demonstrate that you were able to budget to pay off your car over a long period and that you always made your repayments on time, your home loan application will look a whole lot stronger.

• Reorganise your debts. If you've got multiple debts to manage, for example, a car loan, credit cards and personal loans, you might want to consider consolidating your debt into 1 loan. This may make it easier to manage your repayments and get on top of your debt.

• Remember other factors. It's worth remembering that lenders assess a wide range of factors when determining the risks associated with lending you money. So if you have outstanding debt on a car loan and, for example, you only work part-time and have a reduced earning capacity, this will impact upon your application in the eyes of the lender. However, part-time work is usually looked upon more favourably by lenders than casual work.

• Work out a consistent savings plan. Putting money into a savings account regularly, for example, weekly or fortnightly, is a great idea. This will demonstrate to a lender that you are disciplined when it comes to saving money and sticking to a budget.

• Save a larger deposit. The larger the deposit you have saved to buy a home, the less you will need to borrow and the more attractive your loan application is likely to appear to a lender.

• Employment history. Proving a stable and consistent employment history will improve your chances of home loan approval. "Having a consistent employment record doesn't mean you need to have the same job for years, but if you're planning on applying for a home loan, it might be best to hold off changing jobs," Lynch says. If you're looking at returning to work after an extended break such as maternity leave, it may be best to wait until you've been back at work for a few months before applying for a loan.

• Self-employed proof of income. For the self-employed, demonstrating a stable income can be particularly difficult, which is why it's a good idea to have an accountant. "An accountant can help you put together financial statements, which you'll need to include as part of your loan application. Generally, you'll need at least 1 year's history to support your application," Lynch says.

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Name	Product		Interest Rate (p.a.)	Comp. Rate p.a.	Fees	Monthly Payment
loans.com.au Smart Booster Discount Variable Home Loan P&IHome≥ 20% Deposit		Go to site More Info	2.10%	2.46%	App: $0 Ongoing: $0 p.a.	$564	Go to site More Info	Get a low discounted variable rate loan. Requires a 20% deposit. Get your loan processed fast and settle within 30 days.	Compare	loading Fetching your data...
Unloan Variable Home Loan P&IHome≥ 20% Deposit Refinancers only		Go to site More Info	2.14%	2.06%	App: $0 Ongoing: $0 p.a.	$567	Go to site More Info	A low-rate variable home loan from a 100% online lender. Backed by the Commonwealth Bank.	Compare	loading Fetching your data...
OneTwo Variable Rate Home Loan P&IHome≥ 20% Deposit Refi Only		Go to site More Info	2.09%	1.99%	App: $0 Ongoing: $0 per month	$563	Go to site More Info	$5,000 refinance cashback. A variable rate loan for owner-occupier refinancers living in NSW, VIC or SA metro and inner regional areas. Get an extra 0.15% off your rate as you repay the loan and get up to $2,500 in bonus payments. Terms and conditions apply.	Compare	loading Fetching your data...
Suncorp Back to Basics Home Loan P&IHome≥ 30% Deposit		Go to site More Info	2.19%	2.20%	App: $0 Ongoing: $0 p.a.	$570	Go to site More Info	$3,000 cash bonus Variable rate loan for home buyers that requires a 30% deposit. $3,000 cash bonus for eligible borrowers. Other terms, conditions and eligibility criteria apply.	Compare	loading Fetching your data...
Nano Variable Home Loans P&IHome≥ 20% Deposit		Go to site More Info	2.24%	2.24%	App: $0 Ongoing: $0 p.a.	$574	Go to site More Info	Competitive rate with zero fees, fast approval and a 100% free offset account. Available for refinancers and existing buyers purchasing their next home. 20% deposit required.	Compare	loading Fetching your data...
Macquarie Bank Basic Home Loan P&IHome≥ 40% Deposit		Go to site More Info	2.39%	2.39%	App: $0 Ongoing: $0 p.a.	$586	Go to site More Info	This flexible variable rate loan requires a 40% deposit or equity. Get fast online approval and $0 application fee and $0 ongoing fees.	Compare	loading Fetching your data...
Yard Variable Home Loan P&IHome≥ 40% Deposit		Go to site More Info	2.14%	2.17%	App: $0 Ongoing: $0 p.a.	$567	Go to site More Info	Get a low variable rate loan with this online lender. 100% offset account. Requires a 40% deposit.	Compare	loading Fetching your data...
Athena Variable Home Loan P&IHome≥ 40% Deposit Celebrate		Go to site More Info	2.14%	2.14%	App: $0 Ongoing: $0 p.a.	$567	Go to site More Info	Owner occupiers with 40% deposits or equity can get this competitive variable rate loan. No upfront or ongoing fees.	Compare	loading Fetching your data...
HSBC Home Value Loan P&IHome≥ 30% Deposit		Go to site More Info	2.52%	2.53%	App: $0 Ongoing: $0 p.a.	$596	Go to site More Info	$5,000 refinance cashback. A variable rate loan for owner-occupier refinancers living in NSW, VIC or SA metro and inner regional areas. Get an extra 0.15% off your rate as you repay the loan and get up to $2,500 in bonus payments. Terms and conditions apply.	Compare	loading Fetching your data...
Well Money Equity Plus P&IHome≥ 40% Deposit		Go to site More Info	2.07%	2.10%	App: $250 Ongoing: $0 p.a.	$561	Go to site More Info	Borrowers with 40% deposits or equity can get this low variable rate loan. 100% offset account included.	Compare	loading Fetching your data...
IMB Budget Home Loan P&IHome≥ 20% Deposit		Go to site More Info	2.34%	2.35%	App: $449 Ongoing: $0 p.a.	$582	Go to site More Info	A low-rate, no-frills home loan for borrowers with a good deposit and unrestricted repayments. $0 application fee for eligible borrowers with principal-and-interest repayments and deposits of at least 20%.	Compare	loading Fetching your data...
G&C Mutual Bank Momentum Home Loan P&IHome≥ 40% Deposit		Go to site More Info	2.24%	2.26%	App: $0 Ongoing: $0 p.a.	$574	Go to site More Info	A variable rate loan for owner-occupiers looking to refinance. This loan has low fees and a 100% offset account.	Compare	loading Fetching your data...
Great Southern Bank Basic Variable P&IHome≥ 20% Deposit		Go to site More Info	2.49%	2.54%	App: $0 Ongoing: $0 p.a.	$594	Go to site More Info	A basic variable rate loan with minimal fees and a redraw facility.	Compare	loading Fetching your data...
Newcastle Permanent Building Society Real Deal Home Loan P&IHome≥ 20% Deposit		Go to site More Info	2.37%	2.41%	App: $595 Ongoing: $0 p.a.	$584	Go to site More Info	Get up to $3,000 refinance cashback when your LVR is 90% or lower ($2,000 cashback for loan amounts of $250K+ and above, $3,000 for $500K+). Other conditions apply. This variable rate loan requires a 20% deposit and has an offset account.	Compare	loading Fetching your data...
Yard Variable Home Loan P&IHome≥ 20% Deposit		Go to site More Info	2.24%	2.27%	App: $0 Ongoing: $0 p.a.	$574	Go to site More Info	A competitive variable rate loan for home buyers with an optional offset account ($120 annual fee). 20% deposit required.	Compare	loading Fetching your data...
loans.com.au Smart Booster Discount Variable Home Loan P&IHome≥ 20% Deposit		Go to site More Info	2.24%	2.72%	App: $0 Ongoing: $0 p.a.	$574	Go to site More Info	Home buyers can get a very low discounted variable rate for the first year. Requires a 20% deposit. Add an offset sub-account for an additional 0.10% on your interest rate. Get your loan processed fast and settle within 30 days.	Compare	loading Fetching your data...
Well Money Balanced Fixed Home Loan P&IHome 1Y Fixed≥ 10% Deposit		Go to site More Info	3.45%	2.25%	App: $250 Ongoing: $0 p.a.	$671	Go to site More Info	Owner occupiers can get a sharp fixed rate for the first year, plus an offset account. Available with a 10% deposit.	Compare	loading Fetching your data...
Unloan Variable Home Loan P&IInvestment≥ 20% Deposit Refinancers only		Go to site More Info	2.44%	2.36%	App: $0 Ongoing: $0 p.a.	$590	Go to site More Info	Investors can get a low variable rate. Apply online and get fast approval. Backed by the Commonwealth Bank.	Compare	loading Fetching your data...
Yard Variable Home Loan P&IInvestment≥ 20% Deposit		Go to site More Info	2.44%	2.47%	App: $0 Ongoing: $0 p.a.	$590	Go to site More Info	A variable rate loan for investors with an optional offset account ($120 annual fee). 20% deposit required.	Compare	loading Fetching your data...
Great Southern Bank Fixed Rate Home Loan P&IHome 2Y Fixed≥ 5% Deposit		Go to site More Info	4.99%	4.23%	App: $0 Ongoing: $0 p.a.	$806	Go to site More Info	Pay no ongoing fees on a fixed rate home loan with flexible repayment options.	Compare	loading Fetching your data...

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