The difference between debts and liabilities

If you’re in the process of applying for a home loan, you may have come across the terms ‘debts’ and ‘liabilities’. Although they’re often used interchangeably, these two terms refer to two distinct concepts.

Here’s a quick rundown of debts, liabilities and how they come into play when it comes to buying a home.

Debts vs liabilities: What do they mean?

Debts tend to refer to the amount of money that you owe to others. When it comes to the home-buying process, this can include existing loans or credit card balances. Lenders typically assess your existing debts as part of the mortgage application process. This helps them determine your capacity to take on additional debt, like a mortgage. High levels of existing debt might affect your ability to qualify for a home loan.

On the other hand, liabilities are broader than just debts. Liabilities encompass any financial obligations or responsibilities. This can include debts but it also extends to other commitments. When assessing your financial situation, lenders will consider your current debts along with other liabilities. This can include ongoing financial commitments like child support, spousal support or other regular payments that impact your disposable income.

What debts and liabilities are lenders interested in?

When it comes to applying for a home loan, your debts and liabilities, along with your household expenses, are one of the main factors assessed by a lender to determine your borrowing power. Your borrowing power essentially refers to how much a lender is willing to let you borrow based on several key factors, including:

• Your income
• Your debts, liabilities and expenses
• Your savings history and deposit amount
• Your credit history
• The type and length of home loan
• The property you’re looking to purchase

Debts, liabilities and expenses are considered outgoing costs. They’re usually combined to determine your total household expenditure. Here’s what the banks will want to see in terms of your debts, liabilities and expenses. Try our borrowing calculator to get an estimate of what your borrowing power could be.

What is considered a debt or liability?

Although debts and liabilities are two different financial terms, the banks tend to roll them both into a single category when trying to get a gauge on your outgoings. Here’s what your lender will be looking at when it comes to debts and liabilities:

• Existing mortgages
• Credit cards (even if the balance has been paid off)
• Personal loans
• Car loans
• Lines of credit
• Store cards
• Charge cards
• Personal overdrafts
• Margin/investment loans
• Buy now, pay later services (BNPL)
• HECS-HELP loans
• Any other unpaid debts

What is considered an expense?

In addition to your debts and liabilities, the bank will also take your expenses into account when you apply for a home loan. Expenses are payments that go towards the cost of living, like:

• Basic housing and property expenses, including utilities
• Rent or board
• Communications and media
• Food, groceries and pets
• Recreation and entertainment
• Clothing and personal care
• Medical and health
• Transport
• Education and childcare
• Insurance
• Other expenses

Ultimately, the bank will take your debts, liabilities and expenses and compare them against your income to work out how much you can afford to repay. 

When it comes to disclosing the figures around your spending, don’t be tempted to fudge your figures. It’s important to provide an accurate representation of your habits. If you misrepresent your debts and expenses, there’s a good chance that the bank will be able to figure it out for themselves by looking into your bank accounts. 

Tips for improving your borrowing capacity

If you’re not happy with your borrowing power, there are steps you can take to increase your capacity. Here’s what you can do:

• Pay off existing debts: When it comes to improving your borrowing capacity, a good place to start is by paying off or reducing outstanding balances on debts like credit cards and personal loans. 

• Minimise your expenses: While we’re on the topic of reducing your outgoings, are there any areas you can cut back on your spending? It could be worth reviewing your monthly expenses to identify areas where you can trim back. Lenders consider your disposable income when assessing your borrowing capacity, so if you’re spending every last cent it probably won’t go down well with the bank.

• Work on your credit rating: Your credit score is one of the key factors that lenders consider when working out your borrowing capacity. You can easily check your credit score online by using a free tool like Credit Savvy. That should give you a good indication of whether you’re in the green or you’ve got to put in some work to boost your score.

• Keep saving: A bigger deposit can help to reduce your loan-to-value ratio (LVR), which helps to reduce your risk and make you a more desirable borrower in the eyes of the bank. Plus, if you save a deposit of 20% or more, you won’t have to pay lender’s mortgage insurance (LMI). 

• Start a side hustle: While you’re working on reducing your debts and expenses, you might want to consider ways you can boost your income. If you’re not able to negotiate a raise at work, you might want to consider picking up a second job or starting a side hustle if you have time. Don’t worry, it doesn’t have to be forever, just until you can secure a home loan and comfortably afford your repayments.

Are you interested in refinancing your mortgage with Unloan? Check out our eligibility requirements to understand our requirements and improve your chances of loan approval. In the meantime, why not take a look at our amazing loan features? From competitive interest rates and our no fee promise to an annual discount that keeps getting better, we’ve made it our mission to create a loan that saves you more. 

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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, and total borrowings per customer across all Unloan loans is $10,000,000. (For purchase loans a minimum 10% equity is required - however a Lenders Mortgage Insurance (LMI) premium and higher interest rate apply. In some cases, depending on the property’s location or type, an LMI premium may also be required for LVR between 70.01% to 80%). For loans with Lenders Mortgage Insurance (LMI) the minimum loan amount is $10,000, maximum loan amount is $3,000,000 and total borrowings per customer across all Unloan loans is limited to $3,000,000).

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.

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