How Does Debt Impact Your Borrowing Power?

When you apply for a home loan, your lender will assess your application based on a number of different factors. One of the most important elements that your lender will consider is how much debt you have. Ultimately, the amount of debt can impact how much a lender is willing to let you borrow or it could rule you out of borrowing altogether.

Here’s a rundown of how debt affects your borrowing power.

What is borrowing power?

Before we get into things, it can be helpful to understand what borrowing power actually means. Borrowing power is a term used to describe the amount a lender is willing to loan you. 

You may have also heard the term debt capacity. Debt capacity refers to the maximum amount of debt that you as a borrower are deemed capable of managing based on your financial circumstances.

When it comes to calculating your borrowing power, your lender will crunch the numbers based on six key factors:

• Your income,
• Your debt and expenses,
• Your savings history and deposit amount,
• Your credit history,
• Type and length of home loan, and
• The property you’re looking to purchase.

Each lender has their own unique borrowing power formula and lending requirements, so it’s not uncommon for the final figure to differ across lenders. At the end of the day, your lender just wants to make sure you can afford to service your home loan based on your financial situation.

In the meantime, if you’d like to get a rough idea of how much you might be able to borrow based on your current finances, you can use our borrowing power calculator. 

Can you get a home loan with debt?

Just because you’ve got a bit of debt doesn’t necessarily mean that you won’t be able to secure a home loan. With that said, any kind of debt has the potential to reduce your borrowing capacity.

Personal debt can impact your home loan application in a couple of ways. Firstly, your lender will look at your debt when calculating your borrowing capacity. Generally, the more debt you have, the lower your borrowing capacity will be. Secondly, your repayment history, along with any credit applications, will be reflected in your credit score. A good credit score can make it easier to secure a home loan, whereas a poor credit score and impact your chances of approval.

From credit card debt and personal loans to student loans and existing mortgages, there are so many different types of debt, and some are perceived by lenders as better than others.

How does HECS debt affect your home loan?

HECS debt and other student loans can take years to pay off, so it’s not uncommon for borrowers to apply for a home loan while they’re still carrying a sizeable amount of HECS debt. 

Because of the way your HECS debt is structured, some lenders treat it differently from other forms of debt. Unlike traditional forms of debt, like credit cards, car loans and personal loans, HECS repayments are calculated based on how much you earn. Once you hit the HECS repayment threshold, your HECS repayments are automatically deducted from your wage before it even hits your account. That means that HECS debt impacts how much money you have coming into your account after each pay, rather than the amount going out of your account to cover your repayments.

Tips for tackling your debt

If you’re keen to increase your chances of securing a more favourable home loan, it can be worth taking action to manage your debt before applying. Here are a few steps you can take to help you reduce your debt before applying for a home loan:

• Check your credit report: Start by checking your credit score with a free online platform. Make sure you check for any errors or inaccuracies and address them promptly. A clean credit report can improve your creditworthiness and increase your chances of getting approved for a home loan.

• Tackle high-interest debt first: Prioritise paying off high-interest debts, like credit cards or personal loans. Focus on clearing balances with the highest interest rates first, as they cost you the most in the long run. Making extra payments or consolidating debts into a lower-interest loan can help expedite the repayment process.

• Reduce credit card balances: Aim to lower your credit card balances to improve your debt-to-income ratio and overall financial health. Better yet, pay them off and get rid of them completely so you’re not tempted to put things on credit in the future. 

• Get budgeting: Establish a detailed budget that outlines your income, expenses and savings goals. Look for areas where you can cut back on discretionary spending and redirect those funds toward debt repayment. Be sure to stick to your budget to avoid overspending while building your savings for your home loan deposit.

• Avoid new debt: While you’re paying off your existing debt, don’t be tempted to take on new debt. Avoid new credit cards, personal loans or financing major purchases. Any additional debt can raise red flags for lenders and affect your debt-to-income ratio.

Debt isn’t the only factor lenders consider when it comes to assessing your home loan application. For more information on buying a home and home loans in general, check out our Learn Hub. Otherwise, check out our brand-new buy a home offering and apply for conditional pre-approval to get a good idea of how much you can afford to borrow with Unloan. 

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This article is intended to provide general information only. It does not have regard to the financial situation or needs of any reader and must not be relied upon as financial product advice. Please consider seeking financial advice before making any decision based on this information.‍

Unloan is a division of Commonwealth Bank of Australia.

‍Applications are subject to credit approval; satisfactory security and you must have a minimum 20% equity in the property. Minimum loan amount $10,000, maximum loan amount $10,000,000. 

‍Unloan offers a 0.01% per annum discount on the Unloan Live-In rate or Unloan Invest rate upon settlement. On each anniversary of your loan’s settlement date (or the day prior to the anniversary of your loan’s settlement date if your loan settled on 29th February and it is a leap year) the margin discount will increase by a further 0.01% per annum up to a maximum discount of 0.30% per annum. Unloan may withdraw this discount at any time. The discount is applied for each loan you have with Unloan.