It’s not uncommon to take out a loan to buy a car, but if you have a car loan that you’re paying off, you might be wondering how that might affect your home loan, should you decide to apply for it.
When you apply for a home loan, you must inform your lender of all your assets and liabilities. This is because home loan providers are bound by responsible lending laws, which means they must provide you with a loan that is tailored to your particular financial situation. They shouldn’t lend you more money than they think you’ll be able to repay.
If you have a car loan that you are currently paying off, that debt will be considered a liability if you apply for a home loan and could impact how much a home loan provider might be willing to lend you. So how exactly does it work, and do different auto loan types affect your home loan in different ways?
Does a car loan complicate obtaining a mortgage?
A car loan can affect your mortgage application both positively and negatively. The main way it could affect your ability to be approved for a home loan is through its effect on your ability to borrow. When assessing how much money they might be willing to lend you, lenders will consider your debt-to-income ratio (DTI), which compares your overall debt to your income. If you have large car payments each month, this will show up in the debt column and may reduce your borrowing capacity. This could potentially mean you need to save more money for a deposit, or consider paying off more of your car loan before applying for a home loan.
Your car loan repayment history is another factor that can affect your home loan application. Generally speaking, lenders may look more favorably on borrowers who have demonstrated their ability to repay their loans on time. Therefore, if you have a car loan on which you have made regular payments and have never missed a payment or defaulted, this will positively affect your credit score. If you’ve missed payments, it will reflect on your credit score and may cause a lender to consider you a less favorable candidate for a home loan.
Does applying for a car loan affect your credit score?
Just as your loan repayment history can affect your credit score, loan application can also affect it. According to Moneysmart, one of the factors that goes into calculating your credit score is the number of credit applications you have made. The loan applications you make can lower your credit score slightly, and it’s important to keep this in mind if you’re applying for a home loan.
If you’re concerned that your credit score is precariously positioned “on the bubble” and subject to change, it might be a good idea to do your research. There are steps you can take to boost your credit score, but also ways to ruin it. If and you want to keep your credit rating as high as possible, you may find it best to wait to apply for a car loan before applying for a home loan.
Does leasing a car for salary sacrifice affect a home loan?
A lease, where you lease a car instead of buying it, and pay for it through your pre- and after-tax payroll deductions, can also affect your home loan, but in a different way than a standard car loan. When you have a standard car loan, your monthly payments count as a liability, which means the debt portion of your DTI ratio is higher. This may not be the case with a lease, as you pay for the lease through deductions from your paycheck. According to lender loans.com.au, a novation lease is likely to reduce your borrowing power when applying for a home loan, as your take home pay is lower than it would be without the novation lease. This means that the amount a lender is willing to lend you could potentially be lower. That said, loans.com.au advises that a novated lease is unlikely to affect your mortgage application as much as a car loan.
Do cars count as assets for a mortgage loan?
When you apply for a home loan, lenders will consider your assets as well as your debts when deciding how much they are willing to lend you. According to CommBank, an “asset” is something you own that can be converted into cash, and a vehicle counts as an asset, alongside other things like property, savings, superannuation, investments such as stocks, jewelry and furniture. If you are still paying off car loan debt, that debt will count as a liability, but if you own a car, it will count as an asset when applying for a home loan.
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