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What Kind Of Debt Can Impact Your Home Loan?

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What Kind Of Debt Can Impact Your Home Loan?

Most of us have debt of some kind, whether it be car loans, student, or personal loans.

When it comes to securing a home loan, not all existing debts are considered equal.

Not all debts impact your ability to get a home loan, or the conditions of the loan that you do get in the same ways.

The following types of debt can typically impact your home loan application:

Personal loans

Having debt to a personal loan does reduce the amount of income you may have to pay off a home loan, thus potentially reducing your borrowing capacity. Additionally, personal loans tend to have higher interest rates or variable interest rates, which is something that will be taken into consideration in your home loan application. The lender may factor in a buffer on your repayments depending on the state of these factors.

Car Loans

Money owed on a vehicle will be factored in by a home loan provider and may indeed impact your borrowing capacity. However, secured car loans tend to offer lower interest rates than unsecured personal loans, and can represent a lower risk to the lender.

While owing money on a vehicle may still impact your borrowing capacity, a secured car loan will likely not have as big of an impact as an unsecured personal loan might.

Additionally, if you have paid off a car loan this will indicate to lenders your reliability and could boost your loan application.

Student Debt

If you have any outstanding student debt such as HECS debt this might also affect your loan application, despite the payments for this debt not coming out of your spending money. This is because paying off these loans still impacts the amount of money that comes into your account each month.

HECS debts are paid off once you start earning over a threshold- currently $51,957 a year- with the repayment rates starting at 1% of your income to as much as 10% of your income. How much you earn determines the rate at which the debt is paid, so even if you are earning a stable salary a year this may still affect your borrowing capacity as the HECS debt repayment rate also increases.

Various lenders may assess student debt differently, but it is likely to have some impact on your borrowing capacity.

Credit Cards

Credit card debt is probably the most confusing type of debt to affect your home loan application. This is because the lender is less interested in the amount you actually owe, and more concerned with the amount that you could potentially owe if you used all the money that was available to you- factoring in your credit limit more so than your credit card balance.

If you have multiple credit cards it might be worth considering closing some of them before you send in your loan application.

Credit cards can also help improve your credit rating if you have demonstrated that you use them responsibly, demonstrating to lenders that you’re more likely to be a low risk and reliable borrower.

Existing Mortgages

If you have an existing home loan you will need to discuss with the lender if your intention is to keep the loan or discharge it.

If you discharge it the lender won't factor in those repayments when assessing your suitability for a new loan. However, if you choose to keep the loan, the repayments you are making on it will affect your borrowing capacity and could have a major impact on your application.

The plus side of this, however, is that they will also take into consideration any income you have from investment properties, and this will strengthen your application.

When you apply for a home loan the lender will always look at both your level of income and your ability to service a loan. Any outstanding debt you may have can affect wither of these, so it is a good idea to do what you can to reduce your debts before you apply for a home loan.