If you are considering buying a house, you will likely need a home loan. If you already owe on previous advances, whether higher education debt, credit card debt, or personal loan debt, it could impact your home loan application.
Australia has some of the highest household debt in the world. The average household debt is $250,000, according to a recent report from Finder. The ratio of debt to income is 212 per cent, meaning that if a person is earning $80,000 per year, they are spending $169,600.
So, how does debt affect you when applying for a home loan? Here is a brief look at the most common type of debt and their possible effects.
Higher education debt
It is common for Australians to have student debt under the Higher Education Contribution Scheme (HECS). The average four-year bachelor’s degree costs between $18,000 to $30,000, according to the Australian Scholarship Group (ASG). The guidelines of the HECS are such that your employer will begin to take out percentages of your salary once you reach an annual income of $51,309.
When applying for a home loan, lenders will see these numbers and may make decisions accordingly. Because your salary will be reduced to make student loan payments, that means you’ll have less borrowing power. This could have negative impacts on your loan application, especially if you have other forms of debt on top of it.
Credit card debt
Somewhat surprisingly, credit card debt makes up only 1.9 per cent of the average household debt. This is largely because mortgages and investment debts are going to be much higher numbers than what you’ve accumulated through credit card purchases.
Nonetheless, credit card debt can have a big impact on your credit report. If you have a lot, and don’t have a large income, this can look bad to lenders. In addition, if you have made late payments on a credit card or have defaulted, this is a big red flag.
Just like credit card debt, if you owe a lot of money in personal loans, applying for a home loan may be difficult. If you are making big payments each month to pay off a personal loan, lenders may think you’re unable to afford a large home loan payment.
It will look much better to lenders if you have been able to pay off personal loans in the past. Consider trying to pay down personal loans before applying for a home, and you’ll have a much better chance of getting approved.
If you have questions about debt or loan applications, contact our team today.