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Can you get a home loan if you owe taxes?

Peter Terlato avatar
Peter Terlato
- 5 min read
Can you get a home loan if you owe taxes?

When applying for a home loan, your financial standing is a crucial factor for lenders. This includes any outstanding debts or liabilities, such as taxes owed. While owing taxes can potentially impact your ability to secure a home loan, it doesn't automatically disqualify you.

When reviewing your home loan application lenders assess your overall financial position to determine your ability to repay the loan. This includes evaluating your income, expenses and any outstanding debts and liabilities you may have, including taxes owed.

Lenders aim to ensure that your debt-to-income ratio remains within acceptable limits. Owing taxes can potentially affect this ratio, as it increases your overall debt burden. However, lenders consider various aspects of your financial situation before making a decision.

What do banks and lenders know about my taxes?

During the mortgage approval process, lenders gather information that may uncover any tax debts, particularly in the case of commercial or business loan applications. There are two primary documents that can reveal a tax debt:

  • Income Tax Account (ITA): This displays the amount of income tax payable for an individual or business.
  • Integrated Client Account (ICA): The ICA displays your lodgement history and provides details about tax liabilities other than income tax, such as GST and PAYG withholding tax.

Additionally, the bank might notice regular payments made to the Australian Taxation Office (ATO) through your bank transaction history, which could raise further inquiries.

In late 2019, the ATO was granted the ability to report tax debts to credit reporting agencies. This means that your tax liabilities may be visible on your credit report. The ATO may also garnish your wages, bank accounts and debts owed to you as a means of recouping unpaid taxes. These transactions may also be visible to banks and lenders checking loan applications.

Types of tax debt

Not all tax debts are the same, and they can have varying effects on your home loan application. It is essential to understand that tax debts can impact your loan application in different ways. When considering tax debts in relation to your home loan, there are two main categories to take into account:

ATO payment plans

If you have entered into a formal payment plan with the Australian Taxation Office (ATO) to repay your tax debt, lenders may take this into consideration when evaluating your loan application. They will view the repayment plan as an ongoing commitment, similar to any other loan or financial obligation.

Unpaid tax liabilities

If you have unpaid tax liabilities without a formal payment plan in place, lenders may view this as a more significant risk. It could indicate potential financial stress and may affect your ability to meet your mortgage payments.

Impact on credit score

Your credit score is crucial in determining your eligibility for a home loan. Lenders consider your credit score to assess your creditworthiness and determine the terms of the loan.

Owing taxes can affect your credit score, especially if you have unpaid tax liabilities or have defaulted on tax payments in the past. Late payments or non-payment can lead to negative marks on your credit report, which may lower your credit score.

Consider paying down any existing debts to improve your credit score. You might also want to examine these five simple tips if you’re attempting to boost your credit score. However, remember that credit scores aren’t updated in real-time and that you may have to wait some months before you notice any changes.

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What can you do to strengthen your home loan application?

While owing taxes can present challenges when applying for a home loan, there are several mitigating factors that can bolster and support your loan application:

  • Timely tax payments: Demonstrating a consistent history of paying your taxes on time can improve your chances of loan approval. Lenders may view your tax debts in a more favourable light if you have a strong repayment history.
  • Payment plan: If you have a formal payment plan in place with the ATO, providing evidence of your adherence to the plan can be beneficial. It shows a proactive approach to resolving debt and managing your financial obligations.
  • Adequate income and savings: A stable income and a healthy savings account can offset the impact of owing taxes. Lenders may be more likely to consider your loan application favourably if you can demonstrate that you have the financial capacity to meet your mortgage repayments, despite any outstanding tax debt.
  • Professional advice: Seeking professional advice from a mortgage broker or financial advisor who specialises in home loans can be valuable. They can assess your unique situation, provide guidance on the best lenders to approach, and help you navigate the application process effectively.

Owing taxes doesn't automatically disqualify you from obtaining a home loan in Australia.

For example, if your debt is the result of an accountant’s error, or a one-off debt to pay capital gains on a recently sold property, your lender may not see you as a higher-risk borrower. Different lenders will have different policies for borrowers with tax debts seeking home loans.

While some banks may not want to take on a borrower with outstanding tax debts, non-bank lenders may be more willing to accommodate applicants that can prove their ability to repay what they owe and service a home loan.

By understanding the different information and documents that lenders use to assess loan applications - and taking appropriate steps to manage your tax debt - you can potentially improve your chances of securing a home loan.

It’s important to note that the information provided is subject to change, and it may be helpful to consult with the ATO, a financial advisor or tax professional for the most up-to-date and accurate guidance regarding tax debts and their potential impact on credit reports and loan applications.

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Product database updated 28 May, 2024

This article was reviewed by Personal Finance Editor Alex Ritchie before it was published as part of RateCity's Fact Check process.