How Do Existing Debts Affect Your Borrowing Capacity?

How Do Existing Debts Affect Your Borrowing Capacity?

Existing debts can reduce how much you can borrow for a home loan in Australia. When lenders assess your application, they consider how much of your income already goes towards repayments and other financial commitments. A car loan, personal loan or existing mortgage can leave less room for a new home loan. Even a credit card with a zero balance can affect your borrowing power if the lender assesses its credit limit.

How Lenders Assess Existing Debts

Lenders review your income, living expenses and existing financial commitments to estimate how much you could repay on a new mortgage. This is called a serviceability assessment. A lender may test the proposed repayments at a higher interest rate than the one offered to see how much room your budget has if repayments rise.

The details that matter depend on the debt. For a car loan, the lender may consider the scheduled repayment and remaining term. For a credit card, it may estimate a repayment based on the available limit. Lenders use different policies, so the same commitments can lead to different borrowing estimates.

Which Debts Can Reduce Your Home Loan Borrowing Capacity?

Car Loans and Personal Loans

Regular repayments on a car or personal loan reduce the income available for a mortgage. For example, a car loan repayment of $600 a month takes up $7,200 of your annual budget.

Paying down a personal loan may reduce the balance while leaving the scheduled repayment unchanged. Ask how the lender would assess a lower balance or a fully paid-out loan before deciding whether to use your savings.

Credit Cards and Store Cards

A lender may use your credit limit to estimate a monthly commitment because that credit remains available to spend. For example, a card with a $15,000 limit may affect your borrowing capacity even if you pay the balance in full every month. The amount the lender allows for depends on its policy.

Buy Now, Pay Later Accounts

Buy now, pay later (BNPL) instalments can affect how much income a lender considers available for mortgage repayments. Include active accounts and outstanding instalments when listing your financial commitments so the lender can assess them under its policy.

HELP Debt and Existing Mortgages

Compulsory HELP repayments can reduce the income available for a new home loan. How the lender treats those repayments depends on your circumstances and its assessment policy.

If you already have a home loan or investment loan, the lender will consider that commitment as part of the new application. If the property earns rent, the lender may also count a portion of that rental income.

What Is a Debt-to-Income Ratio?

Your debt-to-income ratio (DTI) compares your total debt, including the proposed home loan, with your annual income before tax. In a simplified example, $620,000 in total debt and $100,000 in annual income gives a DTI of 6.2.

DTI shows how much debt you would hold relative to your income. Serviceability looks at whether that income can cover your living costs, existing commitments and proposed mortgage repayments.

Why the Same Salary Can Lead to Different Borrowing Estimates

Imagine two applicants who each earn $110,000 a year and have similar living expenses. One pays $600 a month on a car loan and has a credit card with a $15,000 limit. The other has neither commitment.

If the lender counts the car repayment and an estimated commitment for the credit card, the first applicant has less assessed income available for a mortgage. The difference in borrowing capacity will depend on how the lender treats each commitment.

What to Check Before Applying for a Home Loan

List your debts and credit limits.

Note each balance, scheduled repayment and remaining loan term. Include credit cards, BNPL accounts and any HELP debt.

Gather your latest statements.

Keep documents that show your balances and repayments. If you have paid out a loan or closed an account, keep the confirmation.

Check fees and your deposit before paying out a loan.

Ask for a payout figure and consider how using your savings would affect the amount available for your home deposit.

Compare the total cost before consolidating debt.

Moving a short-term debt into a mortgage may lower the monthly payment. A longer repayment period can increase the total interest you pay.

Talk to VIP Finance About Your Borrowing Capacity

Planning to buy a home while managing existing debts? VIP Finance can help you review your commitments, prepare your documents and understand how different lenders may assess your application. Discuss your borrowing capacity with VIP Finance.

This article provides general information. Borrowing estimates are indicative, and home loan applications are subject to the lender’s assessment and approval criteria.