Will my car loan affect my home loan?

When you apply for a home loan, you must inform your lender about all your assets and liabilities. This is because home loan providers are bound by responsible lending laws, meaning they must provide you with a loan that’s suitable based on your particular financial circumstances. They must not loan you more money than they believe you will be able to pay back.

If you have a car loan that you are currently paying off, then this debt will count as a liability if you apply for a home loan, and it could have an impact on the amount a home loan provider may be willing to lend you.

So, how much does a car loan affect borrowing power and do different types of car loans affect your home loan in different ways?

Does a car loan make it harder to get a home loan?

A car loan can affect your application for a home loan in both positive and negative ways.

The main way that it might affect your ability to be approved for a home loan is through its effect on your borrowing capacity. When assessing how much money they might be willing to loan you, lenders will consider your debt-to-income ratio (DTI), which weighs up your overall debt against your income.

If you have large car repayments each month, this will appear in the debt column and may reduce your borrowing capacity. This could potentially mean you will need to save more money for a deposit or consider paying down more of your car loan before applying for a home loan.

Your history of repayments on your car loan is another factor that can affect your home loan application. Generally speaking, lenders may look more favourably on borrowers who have a demonstrated capacity to repay their loans on time.

Therefore, if you have a car loan that you have been making regular repayments on, and you have never missed a payment or gone into default, this will reflect positively on your credit score.

If you have missed payments, this will be reflected on your credit score and may make a lender consider you a less favourable candidate for a home loan.

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Does applying for a car loan affect your credit score?

Just as your history of loan repayments can affect your credit score, applying for a loan can also affect it.

According to the Australian Government’s Moneysmart website, one of the factors that goes into calculating your credit score is the number of applications you have made for credit.

Applications you make for a loan can lower your credit score slightly, and it is important to keep this in mind if you are applying for a home loan.

If you are concerned that your credit score may be precariously positioned ‘on the bubble’ and likely to change, it could be a good idea to do your research.

There are steps you can take to increase your credit score, but also ways you can ruin it too.

If you wish to keep your credit score as high as possible, then you may find it preferable to hold off on applying for a car loan, before applying for a home loan.

→ Check your credit score for free with Canstar

Does leasing a car through salary sacrifice affect a home loan?

A novated lease (also known as ‘salary sacrificing’ a car) is a three-way agreement between you, your employer and a finance company.

This is where you lease a car instead of purchasing it and pay for it through your pre and post-tax salary deductions. It can also affect your home loan but in a different way than a standard car loan might.

When you have a standard car loan, your monthly repayments count as a liability, meaning that the debt portion of your DTI ratio is higher. This may not be the case with a lease arrangement, because you are paying for the lease via deductions from your salary.

A novated lease is likely to reduce your borrowing power when you apply for a home loan, as your take-home pay is lower than it would be without the lease. This means the amount a lender is willing to loan you could potentially be smaller.

That said, loans.com.au says a novated lease likely won’t affect your home loan application as much as a car loan would.

Do cars count as assets for a mortgage?

When you apply for a home loan, lenders will consider your assets as well as your liabilities when deciding how much money they are willing to loan 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 such as property, savings, superannuation and investments such as shares, jewellery and furnishings.

If you are still paying off the debt for a car loan, then this debt will count as a liability, but if you own a car outright, it will count as an asset when applying for a home loan.

Cover image source: Syda Productions/Shutterstock.com
This is an update of an article originally written by Alasdair Duncan