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Will my car loan affect my mortgage application?

Will my car loan affect my mortgage application?

When you apply for a home loan, the lender must follow responsible lending criteria to verify your financial situation before approving the loan. If a lender finds you’re having difficulty managing your finances or it would be onerous for you to balance your future home loan repayments and existing debts, they have good reason to reject your home loan application or approve you for a smaller amount in some cases.

For instance, lenders generally use a metric called debt-to-income ratio (DTI), to determine your capacity to repay your home loan comfortably without any financial hardship. To calculate your DTI, you can divide the total amount of money you earn by the total of all your debts and liabilities, including credit cards, existing car loan etc.

As an example, let’s assume you’re applying for a home loan of $600,000 with your spouse. Your combined household income is $200,000, and you have got a 20 per cent deposit saved up for your purchase. You both have $2,000 limits - which you use for rent, bills and food - on your credit cards. In this case, your combined liabilities would be:

  • A combined monthly spend of $4,000 on your credit cards
  • $600,000 for the new mortgage

Your total debt would equal $604,000 if your mortgage is approved. You can now calculate your DTI by dividing this figure by your annual income ($200,000), which equals a DTI of three. In other words, your yearly income is about a third of your total debt.

A DTI of three may be within the lender’s limits and you may be eligible for finance - provided you meet other terms. A DTI over six is often considered high-risk, as lenders believe it might put you under financial hardship if interest rates were to rise suddenly or something was to change - such as a job loss.

Coming to the question of whether your car loan will affect your mortgage application, let’s return to the above example and assume you have an outstanding car loan of $32,000 and you lost your job, making your combined income $110,000. In that scenario, your total debts would increase to $636,000 and your DTI would increase to 5.78, pushing you closer to the upper limit where lenders are likely to consider you a high-risk borrower.

Again, the above example is for illustrative purposes only and won’t always match how lenders assess individual decisions.

How much does a car loan affect a mortgage?

A car loan may positively or negatively affect your mortgage application, depending on how you manage your repayments. Under the comprehensive credit reporting (CCR) system, making timely repayments consistently is likely to boost your credit score. However, even a single late payment, not paid within the 14-day grace period, is recorded on your credit file in this system. Furthermore, payments late by 60 days or more, and for amounts over $150, are listed as “default” and remain on your file for five years.

Suppose that you took out a car loan a couple of years ago and you have been repaying it consistently for many months. In that case, your credit score will likely go up, which can improve your chances of home loan approval, provided you meet the lender’s eligibility criteria for a home loan. On the flip side, even a single missed payment will be recorded and might adversely impact your credit score and home loan application.

An outstanding car loan also impacts your borrowing capacity. When you apply for mortgage pre-approval, lenders use your DTI ratio and other housing expenses to determine how much you can borrow for a home. In case you have a large repayment to make on your car loan every month, it’s likely to reduce your borrowing capacity, and you might have to downsize or save more money before purchasing your house.

A car loan affects your mortgage application in other ways, too. When you apply for a car loan, the inquiry will appear on your credit report. This will temporarily lower your credit score, but it isn’t a cause of concern if you maintain good credit. However, if your credit score just about meets the lender’s threshold, inquiries may push it lower, which can potentially impact your mortgage rate.

Will a novated lease affect my mortgage application?

Having a novated lease on your car means that your employer pays down the lease on your vehicle, as well as its running costs, out of your salary package in the form of pre-tax and post-tax salary deductions. Typically, the amount owed on a novated lease isn’t likely to impact your home loan application as much as the monthly repayments on a car loan could. Salary deductions reduce your overall income that can potentially bring down your borrowing capacity.

Overall, if you can afford repayments on both your auto loan and mortgage comfortably along with your other expenses, there’s no likely reason for your car loan to interfere with your mortgage application. The problem only arises when you try to borrow more than you can afford to repay, which is when lenders might consider an outstanding car loan, or any other debt for that matter, as a red flag.

Can I take out a car loan after my mortgage application is approved?

People often space out big loans due to the impact they can have on your credit score. For example, if you’re applying for a mortgage in the near future, you may avoid applying for any credit in the preceding few months. Similarly, after you have applied for a mortgage, it may be better to wait out until settlement to apply for new credit like a car loan.

At times, home buyers confuse mortgage pre-approval with finalised approval. It’s important to remember that your credit is monitored up until the closing date. Any large debt you take on during this period that causes your ratios to go over the limit can derail your mortgage application.

Once the loan amount is disbursed and you already own your home for some time, it’s also possible to cash out your built-up equity into borrowed money to purchase a car.

Using an equity home loan for a car gives you the advantage of low-interest rates compared to a car loan and the convenience of making a single monthly repayment. On the other hand, as home loans are long-term loans, it also means you’d be paying off your car over a much more extended period. Despite a potentially lower interest rate, the considerably longer loan term can translate into thousands of dollars in interest charges over the life of the loan.

The choice between refinancing to unlock your home’s equity or taking out a separate car loan depends on your circumstances and preference. You can always contact a mortgage broker to crunch the numbers and understand your options better.

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Learn more about car loans

What is a secured car loan?

A secured car loan is a loan that is connected to a form of security, or collateral. Generally, the security for a car loan is the car itself. If you fail to repay the loan, the lender might seize your car, sell it and then use the proceeds to recover their debt.

Where can I get a student car loan?

Student car loans are not a necessarily a product in and of themselves, but what you may be looking for is a guarantor car loan.

A guarantor car loan has a third-party act as a form of guarantee for your loan application, telling the bank or lender that if you default on your loan, someone will pay the loan repayments.

Going guarantor on a car loan is no new thing, and before internet-based credit scores, guarantor car loan applicants would apply for loans with a guarantor or property owner who could vouch for the person borrowing the loan.

To get a guarantor car loan, you’ll need someone willing to act as a guarantor for your car loan.

What is a guarantor car loan?

A guarantor car loan is a type of loan that features a guarantor on the agreement. The guarantor is a third-party individual, often a friend or relative, who guarantees the loan will be repaid if the borrower defaults on the car loan.

Guarantor car loans are often geared at people who might otherwise struggle being accepted for a secured car loan when purchasing a vehicle. Some of the reasons might include a lack of credit history such as with a student or young person, if there’s bad credit, or age as a factor such as with pensioners.

What is a loan term?

The loan term is the amount of time the lender gives you to repay the car loan. For example, if you take out a $20,000 car loan with a five-year loan term, you would be expected to pay off the entire $20,000 (plus interest) within five years.

What is a guarantor on a car loan?

A guarantor on a car loan is a third party, usually a relative or friend, who guarantees to meet the repayments of a loan for the purchase of a car, if the borrower/owner of the car defaults on the loan.

Guarantor car loans can be useful for people who would otherwise struggle in being accepted for credit to purchase a vehicle. These may include people with bad credit, students and young people who may have no credit history, as well as some pensioners.

Many lenders offer guarantor car loans, guarantor personal loans and guarantor home loans, because of the significantly reduced risk to the lender.

How to get pre-approval for your ANZ car loan?

Getting pre-approval on your car loan can give you a good idea of how much you may be allowed to borrow. This will help you set your limits while selecting your car. You can apply for pre-approval for an ANZ car loan by filling out a simple online application form, where you’ll have to submit relevant identity, employment and income documentation. 

ANZ will then conduct a credit check based on your application and documentation. It’s important to note that this could have an impact on your credit history. Based on your credit and income documentation analysis, ANZ will provide an amount they are willing to give you as a loan. After this, you can find the right car that matches the proposed loan amount and send it through your final loan application. 

It’s important to remember that pre-approval gives you an indication of how much you can borrow from ANZ to purchase your car, but it doesn’t guarantee the final approval. 

What is a loan-to-value ratio?

The loan-to-value ratio, or LVR, is a percentage that expresses the amount of money owed on the car compared to the value of the car. For example, if you take out a $15,000 loan to buy a $20,000 car, you have a loan-to-value ratio of 75 per cent. Loan-to-value ratios change over time as you pay off your loan and your car depreciates in value. For example, two years later you might now owe $10,000 on your car, which might now be worth $15,000. In that case, although there would still be a $5,000 difference between the size of the outstanding loan and the value of the car, the loan-to-value ratio would now be 67 per cent.

How to get pre-approved for a credit union car loan?

Getting pre-approval for a credit union car loan can make the process and paperwork required to buy a car more streamlined and less stressful. You can apply for pre-approval for a credit union car loan, online or contact your credit union. You’ll be asked to provide relevant documentation regarding your income. After you submit your application, your credit union will review and evaluate it along with the documents you submitted. If you meet the eligibility criteria, your loan will be pre-approved for a specific amount.

With pre-approval for a credit union car loan in hand, you can negotiate your new car’s price with peace of mind you have the funds.

How to find a great car loan

Historically, finding a great car loan would require excess research ranging from visiting an excess of websites or making phone calls, but technology has moved on. Using RateCity, Australia’s leading financial comparison service, you can check out great deals from a range of lenders on the one site.

To start, select the amount you want to borrow and the length of the loan, narrowing your search to show just fixed or variable interest rate results.

Once you’ve indicated your search criteria, you’ll see an immediate list of lenders, ranked by interest rate or application fees. You’ll also be able to view the monthly repayment amount for each result, helping you to know what you can afford.

Up to six products can be compared side-by-side, complete with more information about each car loan, giving you more information about your options.

When comparing your car loan options, it’s ideal to keep in mind some points find a great car loan for your needs. Consider the following:

  • Choosing a low interest car loan can reduce costs
  • Selecting an option with low fees and charges is ideal, because these can really add up
  • Be aware of penalties, such as early exit penalties if you pay off the loan sooner than expected
  • Consider the features that best suit your situation

There are many ways to ensure that you get a great car loan. Ultimately, you’ll end up with the best deal by doing your research and selecting the most suitable product for you.

I’ve been denied a car loan before; can I still get car finance?

Even if you’ve been denied a car loan before, you might still be able to get car finance. The key is to make the right application to the right lender.

The ‘right’ application is one that makes you look like an acceptable risk, which might include things like improving your credit score, increasing your savings rate and accumulating a bigger deposit.

The ‘right’ lender is one that deals with borrowers like you. For example, while some car loan lenders only deal with good credit borrowers, there are others that specialise in bad credit or poor credit borrowers.

Do I need good credit to get a car loan?

You don’t need good credit to get a car loan, although the worse your credit history, the harder and more expensive it’s likely to be.

Some lenders will do business only with borrowers who have good credit. However, there are other lenders that are willing to offer car loans to borrowers who don’t have good credit. The catch, though, is that they may charge higher interest rates and fees, and also require more paperwork.

If you don’t have good credit and want a car loan immediately, you can search for lenders that work with bad credit borrowers. If you are able to wait, you can work to improve your credit score and then apply for a car loan once you have good credit.

Can you get a chattel mortgage with bad credit?

Getting approval for a chattel mortgage with bad credit may be possible, given ‘chattel’ (usually a piece of equipment or car) is put up as security for the loan. That means if you fail to repay the loan, the creditor can recover the loaned amount by repossessing and selling the car or piece of equipment. This differs from unsecured car loans, where the asset is not tied to the loan and cannot be taken if you don’t meet the repayments. 

How to get a chattel mortgage?

Both businesses and individuals may use a chattel mortgage, provided that the car is being used predominantly for business purposes. 

To apply for a chattel mortgage, you need to first consider your options and choose a suitable lender that meets your requirements. Once you have selected a lender, you can apply for the loan online by filling out a form. If the lender doesn’t offer an online application process, you can either call them or visit their nearest branch. 

After you’ve applied, the lender will ask you to supply documents that confirm your identification, income, job profile, etc. If everything is in order, most lenders will arrange the loan’s settlement, so all you need to do is pick up your car!

What is a dealership?

A dealership is a car yard or a place where cars are sold.