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If you’re considering taking out a new car loan (or auto loan) or already paying one off, you’re likely curious whether car finance will impact your chances of securing a home loan.
The short answer is yes: having a car loan absolutely can impact your eligibility for a home loan.
The long answer is slightly more complicated because a car loan can have both negative and positive effects.
Here’s how.
How does a car loan affect your mortgage application?
When mortgage lenders assess your mortgage application, they look at a number of factors (which we’ll get to shortly). One of these is whether you have any outstanding loans, including a car loan.
Using this information, they figure out your debt-to-income ratio (DTI). This ratio basically weighs up how much money you have coming in versus the combined total of any debts and liabilities. A car loan sits in the latter category, along with tax debts, credit card debts and so on.
If a lender believes your DTI ratio is too high (in other words, you have too much debt compared to your income), they may reduce your borrowing power or even deny your home loan application entirely.
The same goes if you’ve got a history of missed or late repayments, which can negatively affect your credit score.
Your credit score (or credit rating) is a number that reflects your history of borrowing money and paying it back (this is known as your credit history). When you apply for a home loan, your lender will perform a credit check to pull up your credit report and determine your credit score.
Just like a high DTI ratio, a bad credit score can decrease your loan amount, subject you to a higher interest rate and possibly result in your home loan application being rejected.
Can a car loan positively impact your chances of getting a home loan?
Conversely, having a car loan could work in your favour. If you’ve got a solid history of consistently making loan payments on time, it can help boost your credit score.
This is especially true if you’ve fully paid off your car loan because it demonstrates a long-term ability to make regular repayments. (Lenders essentially want evidence that you can comfortably make your mortgage payments.)
Lenders may then look more favourably at your application – potentially improving your chances of having it approved, increasing your borrowing capacity or giving you access to a lower interest rate.
If I’ve applied for a car loan, can it impact my credit score?
It sure can. Aside from documenting your loan repayments, your credit history tracks your loan applications – including those for car finance.
If you’ve applied for a car loan – be it for a new car or a used car – it may temporarily lower your credit score.
And if you’ve applied for numerous loans in the past (whether they’re car loans, personal loans or student loans), particularly in a short space of time, it could negatively impact your credit score even further.
Aside from car finance, what factors affect my home loan application?
In Australia, there are multiple financial factors that lenders look at.
Every lender has its own lending criteria, but you can generally expect to provide:
- Your combined income, such as salary, business earnings, income from any investment properties and/or share dividends
- Your day-to-day expenses, like groceries, childcare, rent and memberships
- The amount you have in savings
- Your debts, including car loans and student debt
- Your assets, including your car and any other properties you own
- Your credit card limits and repayments
- Your deposit size
- Who else is applying for the loan, and whether you have any financial dependents
- Any other factors that impact your financial situation
Remember that a car loan is just one of the factors that lenders assess, and even within the car loan itself, there are several variables – including how much debt you still have to pay off and the size of each car payment.
For example, if your monthly payments are only $300 and a few months remain on your loan, you’ll be in less debt than someone paying $1500 per month at the start of their four-year car loan.
If you’re buying your first home and need advice on your outstanding car loan, a mortgage broker can help you navigate the home loan and home-buying process.
You’ll also find more tips for getting a home loan application approved here.
