Debts affecting borrowing power

Is it better to have no debt when applying for a mortgage?

Not all debts are same. Is your debt a good debt or a bad debt, depends on the type and the purpose of that debt.

You may have or will come through lot of conflicting advice around the credit card debt and its effect on the home loan borrowing. However, it all comes to how you are managing your credit card debt. It is worthwhile to speak with a mortgage broker on what suitable approach to take – closing the credit card account or lowering limits.

Another debt which is getting common these days is the Buy Now Pay Later debt. While BNPL providers can give you a great shopping experience, it could also come at the cost of your borrowing power. In some instances lenders will ask you to close the BNPL accounts and provide a proof of that.

If you have a personal loan which is an unsecured loan, your income to service the home loan will reduce at least by the amount of your repayments. Personal loans typically have a higher interest rate too.

Another debt that can affect your income used to service the home loan is student debt.

If you have an existing mortgage, it’s not all bad news. Your property may have some equity that can be used if you are looking to apply for another mortgage to buy an investment property. In some instances it could also help you to pay off the bad debts and make your home loan application stronger. On the other hand any income from investment properties can increase your borrowing capacity.

An important point of consideration is any shared debt. Which is any loan taken out with someone else where you are a co-borrower. If the other person is unable to make repayments to the loan, you are fully responsible for the outstanding balance regardless this person taking out the new loan with you or not. This could affect your borrowing capacity significantly.