How much does a car loan affect a mortgage application

How much does a car loan affect a mortgage application
If you’re applying for a home loan you might be wondering whether your existing car loan will affect your application. Find out the answer here.
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If you’re applying for a home loan you might be wondering whether your existing car loan will affect your application. Find out the answer here, as well as how it can be a positive and negative factor and other factors that are assessed.

Does a car loan affect your home loan application?

A car loan, like any debt, will affect your mortgage application, but whether that is in a positive or negative way depends on your circumstances. A lender has a specific set of critiera they judge potential borrowers on, as well as regulations they are bound by. Basically, the lender needs to know you have the ability to repay the money they are lending to you. A car loan may affect this ability to repay, negatively or positively.

How can it be a positive factor?

The introduction of Comprehensive Credit Reporting (CCR) means you’re rewarded for good credit behaviour. Essentially, things like paying bills on time, in full, not missing repayments, and not taking out lots of loans all have the ability to improve your credit score. Previously, only bad credit behaviour was reported on your credit file, which could make it more difficult to improve your credit score.

If you have been a prudent borrower with regards to your car loan, a lender may look favourably upon you. For example, if you have always made your repayments on time in full, this demonstrates the ability to make regular repayments. Obviously, this is a necessity when it comes to a home loan, as the lender wants to ensure you can service the loan.

Lenders will also more than likely require you to have a good credit score when you apply. Good credit behaviour like paying off your car loan can improve your credit score, which can improve your chances of being approved on your home loan.

How can it be a negative factor?

When you apply for a home loan, you’ll be required to list all the expenses you incur over a period of time, typically a month. This might include rent, utility bills, subscription services like gyms and streaming, and debts, like a car loan. The more expenses you have, the more likely it is your borrowing power will be reduced. If you have your heart set on a particular home, your car loan may mean the lender won’t let you borrow the required amount, as they’re not confident you will be able to handle the monthly loan repayments on top of your current expenses.

If you haven’t been a diligent borrower with your car loan, this could also negatively affect your home loan application. Not making repayments in full or missing them entirely may indicate to the lender you’re not a good borrower, and would struggle with the likely large home loan repayments. This behaviour would also affect your credit score in a negative way, which would be further reason the lender may decide to decline your application.

Does a novated lease impact a home loan application?

A novated lease is a type of salary sacrificing, where your employer pays for your car lease out of your pre-tax salary, bringing down your taxable income, often resulting in tax benefits. A novated lease is likely to affect your home loan application through reduced borrowing power, as you’re take-home pay is lower than it would be without the novated lease. However, it likely won’t affect your home loan application as much as a car loan would.

What other factors do lenders assess?

Lenders assess a large range of other factors when assessing a home loan, including:

  • All forms of income (salary, dividends, rental income)

  • How much of a deposit you have

  • Your credit score

  • Expenses (food, subscriptions, rent)

  • Bills (electricity, phone, water, gas)

  • Debts (car loans, personal loans, payday loans)

  • Buy now, pay later debts

  • Credit card debt and limits

If you’re looking for a low rate home loan (or car loan), get in touch with our friendly team of lending specialists today on Live Chat or by calling 13 10 90.

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Tags: applying for a home loan | home loan application

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