How much can you borrow for a home loan? Probably more without that car loan.

With banks’ lending criteria becoming more rigid, housing affordability not easing and the capacity for many to save for a deposit quite limited, there are many factors coming into play hampering the average mortgage holder in securing a new loan or refinancing an existing facility.

The frustrating thing that we come across all too often is that clients’ own borrowing capacity and their potential to reach their financial goals are being hindered by some of their own life and financial choices. The biggest offender is the humble car loan. Frequently, we have to tell a client that they cannot purchase that dream home or refinance to a better rate because they don’t qualify. But their position would be markedly different if they were not being bogged down by hefty unsecured debt.

To put it in perspective, a car loan of just $25,000 on an average interest rate, with an average income, could potentially allow you to borrow around $100,000 more than if you owed $60,000 on a car. This could be a game changer for many a finance application and more than once we have had clients do some real soul searching around whether or not the car is really worth it in the greater scheme of things.

Another scenario where a car loan can be an unwelcome burden is for purchasers buying off the plan. It’s not unheard of that a contract is signed to buy a property due for completion in the future and before settlement the buyer decides to purchase a car. This can be problematic if the new car loan is going to affect the buyer’s capacity to borrow the amount needed for the property. If finance cannot be obtained then the purchaser may not be able to settle and potentially have to forfeit their deposit. This is why we stress that all off the plan purchasers understand their own responsibilities and check in with a broker if they are looking at making any financial changes to their circumstance prior to their property settlement. This includes obtaining finance for the purchase of a car.

So here’s the thing – there is no denying the necessity of having a car and that there is some form of financial burden associated with the purchase and ownership of one. But for those who do not have the benefit of a high disposable income or good liquidity its prudent to be calculated as to how much you should be looking at spending as there may be negative impacts in other aspects of your financial position.

If you are looking at taking the plunge and upgrading your vehicle but also are planning to either purchase property or refinance your current lending then a chat with your broker is a must. By figuring out what impact, if any, a car loan may have on your impending plans you will be able to enter into both the car purchase and the mortgage application confident that you have your ducks in a row.  You don’t want to cheat yourself out of reaching your financial goals because of a car loan, do you?