A personal loan and a home loan are both debts that you have to repay. If you have an outstanding personal loan which you are repaying comfortably, without eating into your savings, it can reflect positively on your ability to manage debt.
On the other hand, any current debt that you are struggling to repay will suggest to other lenders that you may face the risk of defaulting or being unable to pay back your loans. For this reason, if you apply for a home loan while still repaying a personal loan, you will need to convince the lender about your borrowing power.
Does personal loan affect home loan eligibility?
Any Australian lender will scrutinise your home loan application to verify that:
- you earn enough to repay the loan within the agreed duration
- you have sufficient money saved for a deposit
- your credit score and history confirm your creditworthiness, or ability to manage credit without delays or defaults
A personal loan can affect all three of these factors when you apply for a home loan.
Suppose you’ve taken a personal loan and are making monthly repayments. If your income isn’t high enough, such repayments are likely to reduce your borrowing power, which is estimated as the amount you can set aside from your salary for paying off debt after accounting for savings and living expenses. Worse, you could be dipping into your savings to repay the loan.
And if you find yourself short of cash and missing repayment deadlines, the lender could report such a delay to the credit reporting bureaus. This pulls down your credit score and adds a negative incident to your credit file which, depending on the nature of your lender’s complaint, can stay on the file for a long time.
You may ask, can a personal loan affect home loan eligibility positively? It can if you take a personal loan - which you are perfectly capable of easily repaying - to boost your credit score.
Not many Aussies realise that since Comprehensive Credit Reporting became a reality in 2014, lenders are obliged to report positive and negative incidents to the credit reporting bureaus. Timely repayment of utility and credit card bills and loans will also be reported, in effect helping you build a positive credit history. A higher credit score makes you a more attractive borrower from a lender’s perspective, and you may qualify for special home loan deals.
How can I ensure that my personal loan does not affect my home loan negatively?
Controlling how you spend your income, save money, and build up your credit score can help you minimise and even cancel out any negative impact of personal loans and other credit products. Even if you have had issues with repayments in the past, you can work your way back to become a highly eligible borrower.
Consider the following questions when planning a home loan application:
Do you have no debt or many different debts?
If you have no experience taking on or repaying debt and you have never applied for a utility account or credit card, the three Australian credit reporting bureaus are unlikely to have any credit information regarding you. When a lender requests your credit report, they may not get any information to gauge your creditworthiness. In such a scenario, you may want to consider putting a phone plan or utility bill in your name, or even taking out a small personal loan or a credit card, to start building your credit history.
The other extreme scenario is one where you have several high credit cards with hefty credit limits, and also have an outstanding personal loan or other debt. Lenders may consider your entire credit card limit as a debt you need to repay, no matter how much you’ve actually used. In this scenario, it may be wise to consider paying off as much debt as possible and either cancelling a few of your cards or consolidating your debts before applying for a home loan.
Do you keep an eye on the expenses paid out from your income?
Knowing with a fair degree of accuracy how much you need to spend on for your family or your home can be useful in estimating the size of the repayments you can afford to make. You’ll also be able to save money in a more planned manner, besides convincing lenders more easily about your borrowing power.
Is your home loan research thorough?
Suppose you face financial difficulties and have trouble repaying your personal loan. Your credit score can get hit, but that may not always be bad news. You may need to work a little harder to find a mortgage lender and convince them of your ability to repay the loan, even accounting for somewhat higher interest rates. You may then qualify for a home loan, possibly once you’ve repaid the personal loan.