Having some existing debt won’t automatically stop you from getting a home loan, but it will affect how much you can get approved for – existing does limit what you can borrow.
All debts do cost money and the banks and other lenders will deduct any loan payments when calculating what you can afford. This means any existing debts will affect what you are able to borrow, but some debts affect things more than others.
In this article I will look at the various debts that I see and give an overview of how these existing debts that you might have can affect any home loan applications.
For more specific advice then you are best to contact me with some details.
How Lenders Look At Debt
All banks and lenders will look at your debts when assessing what you can borrow, but you might be interested to know how they look at the different types of debts.
Buy Now Pay Later
These types of payment arrangements are “sold” as ways to spread your purchase price over a few weeks, and because this is interest free these types of debts are quite popular.
But they are still a debt, and being short term the repayments are high too.
You also need to be aware that these all have credit limits so even when you may have not used it for months or even years you may find that they are still listed as being “active” and therefore the lenders do use these facilities with an application.
Most mortgage advisers will suggest that you contact these providers and cancel the accounts, and this will allow the lenders to remove them from the calculations and approve your mortgage to a higher level.
Credit Card Debt
Most people have a credit card, or often more than one credit card and these do affect what you can borrow. Credit cards are popular and can be very handy too, allowing you to manage your money and to buy online.
It’s fine to have a credit card, but you need to be aware that it is another thing that does affect getting a mortgage.
With credit cards it’s the limit not the balance owing that is used in a lenders calculation. This is because there is the ability to spend up to that limit, even if history shows that you pay your credit card off each month.
Car Finance
Car loans are one of the more common types of debts and they often have high repayments too. Many are set up by the car yards when you purchase a car and the focus is often on the speed of getting an approval rather than the loans being very competitive or flexible.
Given that car loans will generally have pretty big repayments they also have a big impact on what you can borrow for a mortgage.
As a mortgage adviser we have access to a number of loan products which obviously include home loans but I can also arrange personal loans and vehicle loans too. Often I can get a better loan and it can make sense to refinance these at times too.
Debt Consolidation Loans
Plenty of people have had a few debts that they have arranged into one debt consolidation loan to make managing that debt easier and potentially to get a lower interest rate.
If you have just recently done a debt consolidation loan then you may be asked to provide the details of the loans prior to refinancing them, but if you had done more than 3-months ago then there should be no requirements for this.
Other times it may be recommended to tidy things up in advance by doing a debt consolidation loan, and I have access to some of the best options too.
Do Large Student Loans Affect Lending?
When we look at student debt the banks aren’t usually too concerned by the loan amount. This is because the student loan repayments are based on your income, regardless of how much is owed.
This means that if you have a good income then you will be paying quite a bit for your student loan. Student debt may be considered ‘good debt’ given that it is interest free and helps improve a person’s earning potential; however it can have a large impact on a home loan application.
Sometimes I will suggest that we switch a student loan to a personal loan with lower repayments, even knowing that this means going from paying no interest (interest free) to paying interest. It’s just that often a student loan means you will not be able to borrow enough for the house that suits.
How Many Debts Are Too Many?
You may have heard some people mention that they get their home loans declined due to having too many debts. This can and does happen, and potentially will happen more in the future. .
When the loans show a pattern of ‘reckless’ spending, the bank may consider whether the applicant is going to responsibly manage the financial obligations of a home loan. Remembering that the lender is needing to assess both for now and the next 20-30 years.
Banks have different policy on how many debts you are allowed, but even those banks that have no limit they will also review what debts you have.
If there have been late payments or if you have been going over your limits with existing debts then the lender may decline your home loan application on the basis of this poor account conduct.
In summary, as you can see when you ask “does existing debt affect getting a home loan” the response might be something like “yes it does, but each situation might be different” so it’s probably best to review things for your own situation.
