When you apply for a mortgage, the lender will assess your application across a range of factors, including any existing debt. Canstar explores how a personal loan can affect your mortgage application.
Can I get a mortgage if I have a personal loan?
Yes, you can still get a mortgage if you have a personal loan. Having a personal loan doesn't automatically disqualify you from getting a mortgage. However, it can affect your eligibility and the terms of the mortgage you qualify for.
How can a personal loan affect a mortgage application?
A personal loan can affect a mortgage application in several ways, including:
Debt-to-income ratio
A debt-to-income (DTI) ratio compares your monthly debt payments to your monthly income. If you take out a personal loan, it adds to your monthly debt obligations, which can increase your DTI ratio. A high ratio can make it more challenging to qualify for a mortgage, as it may signal to lenders that you might struggle to make mortgage payments on top of your other obligations.
Also, the Reserve Bank of New Zealand enforces DTI rules that limit the amount of lending to borrowers with high DTI ratios:
- 20% of owner-occupier mortgages to borrowers with a DTI ratio greater than six.
- 20% of investor loans to those with a DTI ratio greater than seven.
Timing
If you apply for a personal loan just before or during the mortgage application process, it could raise concerns for the mortgage lender. They may want to know the purpose of the loan and how it fits into your overall financial picture.
How your mortgage terms are affected
If you are approved for a mortgage, you may find that your mortgage terms are affected by your personal loan:
Interest rates
Your credit score and financial history play a significant role in determining the interest rate offered by a mortgage lender. If your credit score drops due to a personal loan or if the loan increases your perceived risk, you may be offered a higher mortgage interest rate.
Home deposit
Most mortgage lenders require borrowers to contribute a deposit from their own funds towards the cost of the home. However, if you use a personal loan to fund that deposit, mortgage lenders will reduce your borrowing capacity according to the size of your personal loan debt.
Repayment terms
Lenders will consider the terms of your personal loan when evaluating your mortgage application. A personal loan with a longer term and lower monthly payments could have a smaller impact on your DTI ratio compared to a short-term loan with higher payments.
Can a personal loan improve my mortgage application?
While a personal loan can introduce some challenges when applying for a mortgage, there are potential upsides to having a personal loan in your financial history as well.
Credit mix
Mortgage lenders typically like to see a diverse credit mix on your credit report. This means having different types of credit accounts, such as credit cards, instalment loans (such as personal loans), and mortgages. A well-managed personal loan can add variety to your credit history and potentially have a positive impact on your credit score, which can benefit your mortgage application.
Responsible debt management
Demonstrating that you can manage various forms of credit responsibly, including personal loans, can show lenders that you are a responsible borrower. This may make you more appealing to them during the mortgage approval process.
How can I get my application approved?
To minimise the potential negative impact of a personal loan on your mortgage application, consider the following:
- Manage your debt responsibly and maintain a good credit score.
- Avoid taking on new debt shortly before applying for a mortgage.
- Consult with a mortgage lender or financial advisor to understand how a personal loan may affect your specific situation.
- Be prepared to explain the purpose of the personal loan and how you intend to manage your finances to meet both loan obligations.
- Compare personal loans to find the best options for your financial needs.
Keep in mind that the impact of a personal loan on your mortgage application can vary depending on the lender, the loan amount, your financial situation, and the current lending environment.
If you have a personal loan and want to apply for a mortgage, it's sensible to talk to a financial advisor to understand how your loan might affect your mortgage application and to find the best financial plan for you.
