Taking out a loan to purchase a car is not uncommon, but if you do have a car loan that you’re paying off, you may be wondering how this could affect your home loan, should you decide to apply for one.
When you apply for a home loan, you must inform your lender about all of 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, should you apply for a home loan, and could have an impact on the amount that a home loan provider may be willing to lend you. So, how exactly does this work, and do different types of car loan 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 Moneysmart, 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 and 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.
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Does leasing a car through salary sacrifice affect a home loan?
A lease arrangement, in which you lease a car instead of purchasing it, and pay for it through your pre and post-tax salary deductions, 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. According to lender loans.com.au, 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 novated lease. This means the amount a lender is willing to loan you could potentially be smaller. That said, loans.com.au says that 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 like property, savings, superannuation, 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.
Provider
Star Rating
Interest rate
Comparison rate^
Monthly repayment
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New and Used Cars, Borrow between $2,001 - $75,000
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6.69%
Glossary
up to 9.29%
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Fixed
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7.32%
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up to 11.98%
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$393.11
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up to $417.99
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Fees & charges apply, Australian Credit Licence 488228
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New and Demo cars only
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6.39%
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Fixed
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7.52%
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$390.29
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Fees & charges apply, Australian Credit Licence 395219
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Member benefit rate
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6.59%
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up to 13.59%
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Fixed
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7.29%
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up to 14.34%
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$392.17
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up to $461.12
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Fees & charges apply, Australian Credit Licence 391488
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Credit Concierge is a specialist car finance broker for 45+ providers. This is one loan in our database. Rates start from 6.29% comparison to 8.29% comparison.
6.29%
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Fixed
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6.99%
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$389.36
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Fees & charges apply, Australian Credit Licence 511803
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ALASDAIR DUNCAN
Senior Finance Journalist
Alasdair Duncan is a Senior Finance Journalist at Canstar, specialising in home loans, property and lifestyle topics. He has written more than 200 articles for Canstar and his work is widely referenced by other publishers and media outlets, includingYahoo Finance,The New Daily,The Motley FoolandSky News. He has featured as a guest author for property websitehomely.com.au.
In his more than 15 years working in the media, Alasdair has written for a broad range of publications. Before joining Canstar, he was aNews Editor atPedestrian.TV, part of Australia’s leading youth media group. His work has also appeared onABC News, Junkee, Rolling Stone, Kotaku, the Sydney Star Observer and The Brag. He has a Bachelor of Laws (Honours) and a Bachelor of Arts with a major in Journalism from theUniversity of Queensland.
When he is not writing about finance for Canstar, Alasdair can probably be found at the beach with his two dogs or listening to podcasts about pop music. You can follow Alasdair onLinkedInandTwitter.
Alasdair Duncan is a Senior Finance Journalist at Canstar, specialising in home loans, property and lifestyle topics. He has written more than 200 articles for Canstar and his work is widely referenced by other publishers and media outlets, includingYahoo Finance,The New Daily,The Motley FoolandSky News. He has featured as a guest author for property websitehomely.com.au.
In his more than 15 years working in the media, Alasdair has written for a broad range of publications. Before joining Canstar, he was aNews Editor atPedestrian.TV, part of Australia’s leading youth media group. His work has also appeared onABC News, Junkee, Rolling Stone, Kotaku, the Sydney Star Observer and The Brag. He has a Bachelor of Laws (Honours) and a Bachelor of Arts with a major in Journalism from theUniversity of Queensland.
When he is not writing about finance for Canstar, Alasdair can probably be found at the beach with his two dogs or listening to podcasts about pop music. You can follow Alasdair onLinkedInandTwitter.