Many borrowers assume that if they are making their repayments on time, their existing debts will have little impact on a home loan application.
The reality is often very different.
When assessing a home loan, lenders look closely at your existing financial commitments to determine how much additional debt you can comfortably afford. In some cases, debts that seem small or manageable can have a surprisingly large impact on borrowing capacity.
Understanding how lenders assess debts and liabilities can help you prepare for a home loan application and avoid unexpected surprises along the way.
Home Loan Assessment Series
Understanding how lenders assess a home loan application can help you avoid surprises and put yourself in the strongest position possible.
Available guides:
What Banks Look for in Your Bank Statements
What Banks Look for on Your Credit File
What Banks Look for in Your Living Expenses
What Banks Look for in Your Employment & Income
What Banks Look for in Your Existing Debts & Liabilities
What Banks Look for Before Approving a Home Loan (Complete Guide)
Why Banks Review Existing Debts and Liabilities
When assessing a home loan application, lenders need to understand your existing financial commitments.
This helps them determine whether you can comfortably afford the proposed home loan repayments alongside your current obligations.
Existing debts can affect:
- Borrowing capacity
- Loan affordability
- Debt-to-income ratios
- Overall risk assessment
While your income is important, lenders also need to understand where that income is already being committed.
Employment and income, living expenses, credit history and existing debts all work together when determining whether a loan is suitable.
Credit Cards
Credit cards are one of the most misunderstood aspects of a home loan application.
Many borrowers assume that if the balance is low, or even zero, the card has little impact on their borrowing capacity.
However, lenders generally assess the credit limit rather than the outstanding balance.
For example, a credit card with a $20,000 limit may reduce borrowing capacity significantly, even if there is no balance owing.
This is because lenders assume the limit could be fully utilised at any time.
Personal Loans
Personal loans are generally treated as ongoing financial commitments.
Lenders will typically consider:
- Current balance
- Monthly repayment
- Remaining loan term
Even relatively small personal loans can impact borrowing capacity, particularly when combined with other commitments.
Car Loans and Asset Finance
Vehicle finance is another common liability lenders assess.
Whether the loan is secured by a personal vehicle, work vehicle or business asset, lenders generally include the repayment when assessing affordability.
The larger the repayment, the greater the impact on borrowing capacity.
Buy Now Pay Later Accounts
Services such as:
- Afterpay
- Zip
- Humm
- PayPal Pay in 4
have become increasingly common.
Some lenders are comfortable with occasional use, while others assess these facilities more conservatively.
In some cases, multiple Buy Now Pay Later accounts may indicate higher discretionary spending and prompt further questions during the assessment process.
HELP and HECS Debt
Many borrowers are surprised to learn that HELP and HECS debts can impact borrowing capacity.
While these debts do not generally appear as a regular loan repayment, the compulsory repayments deducted through the tax system reduce your available income.
As a result, lenders often factor HELP obligations into their servicing calculations.
Tax Debts
Outstanding tax debts can create challenges during a home loan application.
The impact often depends on:
- Whether a payment arrangement is in place
- The size of the debt
- The lender being considered
Some lenders are more flexible than others when it comes to tax liabilities, particularly for self-employed borrowers.
Guarantees and Other Financial Commitments
Lenders may also review:
- Existing guarantees
- Lease commitments
- Margin loans
- Other ongoing liabilities
These commitments can affect overall affordability and borrowing capacity, even if they are not immediately obvious.
Common Debt Myths
“I Don’t Owe Anything on My Credit Card”
The balance isn’t always the issue.
Many lenders assess the credit limit rather than the amount currently owing.
“Buy Now Pay Later Doesn’t Matter”
Not always.
Different lenders assess these facilities differently, and multiple accounts can sometimes raise concerns.
“My Car Loan Is Small So It Won’t Affect Borrowing Capacity”
Even modest repayments can impact servicing calculations.
When combined with other commitments, the effect can become more significant than borrowers expect.
Why Two Borrowers on the Same Income Can Get Different Results
It is surprisingly common for two borrowers earning similar incomes to receive very different borrowing capacities.
This can happen because lenders assess much more than income alone.
They also consider:
- Existing debts
- Credit card limits
- Living expenses
- Employment type
- Credit history
For example, two borrowers earning $120,000 per year may receive very different borrowing outcomes if one has multiple credit cards, a car loan and a HELP debt while the other has no ongoing liabilities.
This is one reason why working with a broker can be valuable when comparing lender options.
How We Help
At Shoreline Lending, we help clients understand how lenders are likely to assess their debts and liabilities before an application is submitted.
This includes:
- Reviewing existing commitments
- Identifying opportunities to improve borrowing capacity
- Understanding lender policy differences
- Comparing lender servicing models
- Structuring applications correctly from the outset
The goal is to reduce surprises and put your application in the strongest possible position.
Continue Reading
Understanding employment and income is only one part of the home loan assessment process.
You may also find these guides helpful:
What Banks Look for in Your Bank Statements
What Banks Look for on Your Credit File
What Banks Look for in Your Living Expenses
What Banks Look for in Your Employment & Income
The Bottom Line
Lenders are not simply assessing how much you earn.
They are assessing how much of your income is already committed elsewhere and whether the proposed home loan remains affordable.
Understanding how banks assess debts and liabilities can help you prepare properly, improve borrowing capacity and avoid common mistakes during the application process.
We Can Help You Make the Right Move
If you’re considering buying, investing, relocating or refinancing on the Central Coast, we’re here to help you map out your next steps with clarity and confidence.
At Shoreline Lending, we specialise in guiding Central Coast homeowners and families through every stage of their lending journey, with a relaxed approach and expert advice.
Book your free home loan strategy session no pressure, just expert guidance.
Not ready to book? Contact us anytime and we’ll happily help answer your questions.