Does a car loan affect your mortgage application?

A car loan can help you own your next set of wheels sooner, but it can also reduce your borrowing power when you apply for a home loan.

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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. 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?

woman holding a car keyEach 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.”

Can a car loan reduce the amount I can borrow?

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's car loan

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.

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 three 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 are 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 one 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 therefore 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 one year’s history to support your application,” Lynch says.

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loans.com.au Smart Booster Discount Variable Home Loan P&IHome≥ 20% Deposit

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1.85%
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1.99%
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Owner occupiers with 40% deposits or equity can get this competitive variable rate loan. No upfront or ongoing fees.

Nano Variable Home Loans P&IHome≥ 25% Deposit Refi Only

Nano Variable Home Loans
1.99%
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$555
Switch to this competitive variable rate with zero fees. Requires a 25% deposit.

HSBC Fixed Rate Home Loan Package P&IHome 2Y Fixed≥ 20% Deposit

HSBC Fixed Rate Home Loan Package
1.88%
2.86%
  • App: $0
  • Ongoing: $390 p.a.
$547
$3,288 refinance cashback offer
Lock in a low fixed rate for 2 years and buy your home with a 20% deposit. Eligible refinancers borrowing $250,000 or more can get a $3,288 cashback. Terms and conditions apply.

Suncorp Home Package Plus Fixed P&IHome 2Y Fixed≥ 20% Deposit

Suncorp Home Package Plus Fixed
1.89%
2.85%
  • App: $0
  • Ongoing: $0 p.a.
$548
$3,000 refinance cash bonus
Lock in a low fixed rate for 2 years. Available with a 20% deposit. Eligible new borrowers can get the annual package fee reimbursed for the life of the loan. $3,000 refinance cash bonus for eligible borrowers. Other terms, conditions and eligibility criteria apply.

Well Home Loans Equity Plus P&IHome≥ 40% Deposit

Well Home Loans Equity Plus
1.87%
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  • App: $250
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$546
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Homestar Star Gold P&IHome≥ 40% Deposit

Homestar Star Gold
1.79%
1.84%
  • App: $395
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$540
Refinancers and buyers with 40% deposits can get this very competitive variable rate. It even comes with a 100% offset account.

Virgin Money Reward Me Fixed Rate Home Loan P&IHome 2Y Fixed≥ 20% Deposit

Virgin Money Reward Me Fixed Rate Home Loan
1.98%
2.66%
  • App: $300
  • Ongoing: $10 per month
$555
$3,000 refinance cashback.
Buy your home and lock in a low rate for the first two years. Get a $3,000 cashback when you switch to Virgin Money with a loan amount of $300,000 or more with an LVR up to 80%. You must apply by 30 November 2021 and settle by 28 February 2022.

Macquarie Bank Basic Fixed Home Loan P&IHome 3Y Fixed≥ 30% Deposit

Macquarie Bank Basic Fixed Home Loan
2.09%
2.17%
  • App: $0
  • Ongoing: $0 p.a.
$563
Get a low interest rate and a mortgage with flexible, basic features. No application or ongoing fees. Requires a 30% deposit. Refinancers can switch with a convenient digital application.

IMB Fixed Rate Home Loan P&IHome 2Y Fixed≥ 5% Deposit

IMB Fixed Rate Home Loan
1.97%
2.88%
  • App: $449
  • Ongoing: $6 per month
$554
NSW and ACT customers only. Lock in a low fixed rate for two years. Available with a 5% deposit.

ME Flexible Home Loan Fixed with Members Package P&IHome 2Y Fixed≥ 20% Deposit

ME Flexible Home Loan Fixed with Members Package
1.89%
3.17%
  • App: $0
  • Ongoing: $395 p.a.
$548
$3,000 cashback when refinancing a loan of $250,000 or more. Other conditions apply. Lock in a competitive rate for owner occupiers for two years. Comes with a 100% offset account.

Newcastle Permanent Building Society Premium Plus Package Fixed Rate P&IHome 3Y Fixed≥ 20% Deposit

Newcastle Permanent Building Society  Premium Plus Package Fixed Rate
2.09%
3.58%
  • App: $0
  • Ongoing: $395 p.a.
$563
$2,000 cashback for eligible refinancers borrowing $250,000 or more.

Greater Bank Great Rate Fixed Home Loan P&IInvestment 1Y Fixed≥ 20% Deposit

Greater Bank Great Rate Fixed Home Loan
1.89%
2.27%
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$548
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Well Home Loans Balanced Fixed Home Loan P&IHome 1Y Fixed≥ 10% Deposit

Well Home Loans Balanced Fixed Home Loan
1.84%
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$544
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homeloans.com.au Low Rate Home Loan with Offset P&IHome≥ 40% Deposit

homeloans.com.au Low Rate Home Loan with Offset
2.14%
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$567
A competitive rate with no application or ongoing fees. This loan is not available for construction.

Australian Unity Health, Wealth and Happiness Package Fixed Home Loan P&IHome 3Y Fixed≥ 30% Deposit

Australian Unity Health, Wealth and Happiness Package Fixed Home Loan
2.14%
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$567
Home buyers can lock in a low rate for 3 years. Requires a 30% deposit.

Macquarie Bank Basic Home Loan P&IHome≥ 40% Deposit

Macquarie Bank Basic Home Loan
2.14%
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$567
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UBank UHomeLoan Fixed P&IHome 3Y Fixed≥ 20% Deposit

UBank UHomeLoan Fixed
1.85%
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$545
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HSBC Home Value Loan P&IHome≥ 30% Deposit

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2.19%
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4 Responses

    Default Gravatar
    JasonApril 15, 2018

    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

      Default Gravatar
      ArnoldApril 16, 2018

      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

    Default Gravatar
    LokeshJanuary 12, 2017

    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

      Avatarfinder Customer Care
      MayJanuary 12, 2017Staff

      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

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