Author: Alasdair Duncan
When you apply for a home loan, you must inform your lender about all of your assets and liabilities. This is because home loan providers are bound by responsible lending laws. Meaning they must provide you with a loan that’s suitable based on your particular financial circumstances. They must not loan you more money than they believe you will be able to pay back.
If you have a car loan that you are currently paying off, then this debt will count as a liability. Should you apply for a home loan, it could have an impact on the amount that a home loan provider is willing to lend you. So, how exactly does this work? And do different types of car loans affect your home loan in different ways?
Does a car loan make it harder to get a home loan?
A car loan can affect your application for a home loan in both positive and negative ways.
The main way that it might affect your ability to be approved for a home loan is through its effect on your borrowing capacity. When assessing how much money they might be willing to loan you, lenders will consider your uncommitted monthly income or debt service ratio.
While these are calculated differently, they more or less look at the same thing: the amount of disposable income you’re left with once your bills, living expenses and hypothetical mortgage payments are accounted for.
If you have large car repayments each month, this may reduce your borrowing capacity. This could potentially mean you will need to save more money for a deposit, or consider paying down more of your car loan before applying for a home loan.
On the other hand, if you still have plenty of money to spare each payday, even with a car loan to pay back, then you won’t need to worry too much about your car loan thwarting your home loan application.
Your history of repayments on your car loan is another factor that can affect your home loan application. Generally speaking, lenders may look more favourably on borrowers who have a demonstrated capacity to repay their loans on time.
Therefore, if you have a car loan that you have been making regular repayments on, and you have never missed a payment or gone into default, this will reflect positively on your credit score.
But if you have missed payments, this will be reflected on your credit score and may make a lender consider you a less favourable candidate for a home loan.
→Related article: How Much Can I Borrow to Buy a House?
Compare car loans with Canstar
The table below displays some of the unsecured personal loan products available on Canstar’s database for a three-year loan of $10,000 in Auckland (some may have links to lenders’ websites). The products are sorted by Star Rating (highest to lowest) followed by company name (alphabetical). Use Canstar’s personal loan comparison selector to view a wider range of products on Canstar’s database. Canstar may earn a fee for referrals.
Does applying for a car loan affect your credit score?
Just as your history of loan repayments can affect your credit score, applying for a car loan (or any loan) can also affect it. One of the factors that goes into calculating your credit score is the number of applications you have made for credit. Applications you make for a loan can lower your credit score slightly, so it’s important to keep this in mind if you are applying for a home loan.
If you are concerned that your credit score may be precariously positioned, it could be a good idea to do your research. There are steps you can take to improve your credit score, but also ways you can ruin it, too.
If you wish to keep your credit score as high as possible, then you may find it preferable to hold off applying for a car loan before applying for a home loan.
Do cars count as assets for a mortgage?
When you apply for a home loan, lenders will consider your assets as well as your liabilities when deciding how much money they are willing to loan you.
An asset is something you own that can be converted into cash, and a vehicle counts as an asset, alongside other things like property, savings, superannuation, investments such as shares, jewellery and furnishings.
If you are still paying off the debt for a car loan, then this debt will count as a liability, but if you own a car outright, it will count as an asset when applying for a home loan.
About the reviewer of this page
This report was reviewed by Canstar Content Producer, Andrew Broadley. Andrew is an experienced writer with a wide range of industry experience. Starting out, he cut his teeth working as a writer for print and online magazines, and he has worked in both journalism and editorial roles. His content has covered lifestyle and culture, marketing and, more recently, finance for Canstar.