Will a personal loan affect my mortgage application?

Will a personal loan affect my mortgage application?

Buying a house for many Australians can be difficult. You may have taken out credit cards and personal loans previously with no issue so assume that a home loan is no different. However, when you apply, you discover that even the smallest of your expenses seems to impact your chances of getting a home loan. So you ask the question, will a personal loan affect your chances of getting a home loan?

Mortgage lenders need to ensure that you’re capable of meeting your monthly repayments before approving your application. As part of reviewing your application, they’ll most likely evaluate your credit history, including credit cards, savings, and even closed and existing personal loans. This analysis helps the lender determine how much you can comfortably borrow and then repay if they approve your home loan application.

Essentially, a personal loan’s impact on your home loan depends on whether you can meet both sets of repayments without facing any financial stress.

How do personal loans negatively affect your mortgage application?

Most lenders usually use the debt-to-income (DTI) ratio when assessing your home loan application. This ratio determines the percentage of your pre-tax monthly income available to pay your debt and other household expenses. The lower your DTI ratio, the better it is for your application. Any form of debt is a liability, which leads to an increase in this ratio, including your personal loan.

The main concern that most lenders have while checking your application is how your personal loan impacts your spending power. When you apply for a home loan, the lender will assess your income and compare it to your expenses, including your personal loan’s monthly repayment. For example, say you’re paying $100  in monthly personal loan repayments, that’s $100 less available for your mortgage repayments.

Also, if you miss paying your personal loan repayments, it can impact your credit score. Any change to your credit score directly affects your mortgage application. This behaviour raises a red flag for lenders as it indicates that you’re an irresponsible borrower.

Do personal loans positively affect your mortgage application?

Lenders don’t always consider a personal loan as bad news when assessing your mortgage application. While lenders evaluate if you can afford the monthly repayments, they also give high value to your credit score. This is where a personal loan can help you move closer to an approved home loan. 

If you’re responsible with your personal loan, are consistent and timely with repayments, it will ultimately boost your credit score. A high credit score indicates that you’re a low-risk borrower, which will likely increase the chances of getting a home loan approved and access to better interest rates.

How can personal loans be used to boost your chances of home loan approval?

1. Don’t miss repayments

With the introduction of Comprehensive Credit Reporting (CCR), lenders can now access more information than ever before about your credit history. This increased access to information makes it more important to stay on top of your personal loan repayments and maintain a positive track record. Doing this will boost your credit score and help you land a good home loan deal. You could even consider making repayments that are more than the minimum monthly amount, as it demonstrates your ability to save.

If you have multiple debts, you could consider debt-consolidation through your home loan, which will help manage your repayments easily, while saving on interest.

2. Pay off or close as much debt as possible

A closed personal loan is no longer considered a liability and therefore, doesn’t negatively impact your DTI ratio. So, if you’re not in a hurry to buy a house, you could consider clearing your debt first before applying for the home loan. Also, if you’ve got multiple credit cards, consider closing or reducing the limit on a few to reduce your DTI ratio. This will then increase your chances of getting a home loan approved.

3. Don’t overdo credit applications

Having a personal loan that is repaid on time can work wonders for your credit score. But, it’s important not to go overboard by applying for too much credit. Every time you apply for credit like personal loans, you will undergo a hard enquiry on your credit history, expenses and debt. A hard enquiry then appears on your credit file, and too many hard enquires can impact your credit score. Also, if you have too many on-going hard queries, lenders might think you’re financially careless or desperate for credit.

Did you find this helpful? Why not share this article?



Money Health Newsletter

Subscribe for news, tips and expert opinions to help you make smarter financial decisions

By signing up, you agree to the RateCity Privacy Policy, Terms of Use and Disclaimer.


Learn more about personal loans

What is a personal loan?

A personal loan sits somewhere between a home loan and a credit card loan. Unlike with a credit card, you need to sign a formal contract to access a personal loan. However, the process is easier and faster than taking out a mortgage.

Loan sizes typically range from several hundred dollars to tens of thousands of dollars, while loan terms usually run from one to five years. Personal loans are generally used to consolidate debts, pay emergency bills or fund one-off expenses like holidays.

Does refinancing a personal loan hurt your credit score?

Personal loan refinancing means taking out a new loan with more desirable terms in order to access a more competitive interest rate, longer loan term, better features, or even to consolidate debts.

In some situations, refinancing a personal loan can improve your credit score, while in others, it may have a negative impact. If you refinance multiple loans by consolidating these into one loan, it could improve your credit score as you’ll have only one outstanding debt liability. Your credit may also improve if you consistently pay the instalments on time.

However, applying to refinance with multiple lenders could negatively affect your credit if your applications are rejected. Also, if you delay or default the repayment, your credit score reduces.

Can I merge my personal loan with my home loan?

Yes, you can refinance your home loan and, in the process, merge or consolidate your personal loan and home loan. By doing so, you can lower the number of debts you have, and you may also reduce the total interest you have to pay.

However, you should consult a financial advisor or a mortgage broker to confirm that you are decreasing your total outstanding debt, including interest payments. The repayment term for a home loan can be much longer than that for a personal loan, and by merging the two, you could be repaying a higher amount over the full term.

What is a bad credit personal loan?

A bad credit personal loan is a personal loan designed for somebody with a bad credit history. This type of personal loan has higher interest rates than regular personal loans as well as higher fees.

How can I get a $3000 loan approved?

Responsible lenders don’t have guaranteed approval for personal loans and medium amount loans, as the lender will want to check that you can afford the loan repayments on your current income without ending up in financial hardship.

Having a good credit score can increase the likelihood of your personal loan application being approved. Bad credit borrowers who opt for a medium amount loan with no credit checks may need to prove they can afford the repayments on their current income. Centrelink payments may not count, so you should check with the lender prior to making an application.

Can I get a bad credit personal loan with a guarantor?

Some lenders will consider personal loan applications from a borrower with bad credit if the borrower has a family member with good credit willing to guarantee the loan (a guarantor).

If the borrower fails to pay back their personal loan, it will be their guarantor’s responsibility to cover the repayments.

Can you refinance a $5000 personal loan?

Much like home loans, many personal loans can be refinanced. This is where you replace your current personal loan with another personal loan, often from another lender and at a lower interest rate. Switching personal loans may let you enjoy more affordable repayments, or useful features and benefits.

If you have a $5000 personal loan as well as other debts, you may be able to use a debt consolidations personal loan to combine these debts into one, potentially saving you money and simplifying your repayments.

Can I get guaranteed approval for a bad credit personal loan?

Few, if any, lenders would be willing to give guaranteed approval for a bad credit personal loan. Borrowers with bad credit histories can have more complicated financial circumstances than other borrowers, so lenders will want time to study your application. 

It’s all about risk. When someone applies for a personal loan, the lender evaluates how likely that borrower would be to repay the money. Lenders are more willing to give personal loans to borrowers with good credit than bad credit because there’s a higher likelihood that the personal loan will be repaid. 

So a borrower with good credit is more likely to have a loan approved and to be approved faster, while a borrower with bad credit is less likely to have a loan approved and, if they are approved, may be approved slower.

How much can you borrow with a bad credit personal loan?

Borrowers who take out bad credit personal loans don’t just pay higher interest rates than on regular personal loans, they also get loaned less money. Each lender has its own policies and loan limits, but you’ll find it hard to get approved for a bad credit personal loan above $50,000.

Can I repay a $3000 personal loan early?

If you receive a financial windfall (e.g. tax refund, inheritance, bonus), using some of this money to make extra repayments onto your personal loan or medium amount loan could help reduce the total interest you’re charged on your loan, or help clear your debt ahead of schedule.

Check your loan’s terms and conditions before paying extra onto your loan, as some lenders charge fees for making extra repayments, or early exit fees for clearing your debt ahead of the agreed term.

Is a personal loan a variable or fixed-rate loan?

Depending on the personal loan lender, you may be able to choose between a fixed and a variable interest rate. But, there are a few distinct differences between the two, so it’s important to weigh up the pros and cons before deciding on what’s right for you.

A fixed interest rate loan gets you the convenience of knowing exactly how much you need to repay each fortnight or month. On the other hand, you generally won’t be able to make lump sum or advanced payments to close your personal loan early - or at least not without a penalty.

With a variable interest rate personal loan, you may be able to get a longer loan repayment term, with the option of paying off the loan early. You typically won’t need to pay any additional charges for an early full repayment either. The potential disadvantage with an interest rate that can change is that your repayment is not entirely predictable, as it can fluctuate with the market. However, you’ll likely have more options as more lenders offer a variable interest rate personal loan.

Which lenders offer bad credit personal loans?

Several dozen lenders offer bad credit personal loans in Australia. These are generally smaller lenders that aren’t household names.

What interest rates are charged for personal loans?

Lenders aren’t allowed to charge interest on loans of $2,000 and under. Instead, they make their money by charging a one-off establishment fee of up to 20 per cent and a monthly account-keeping fee of up to four per cent. Lenders might also ask you to pay a government fee.

For loans between $2,001 and $5,000, lenders can make their money in only two ways: a one-off fee of $400 and annual interest rates of up to 48 per cent.

For loans of $5,001 and above, or for loans that have terms longer than two years, lenders can charge annual interest rates of up to 48 per cent.

Those fee caps don’t apply to loans offered by authorised deposit-taking institutions such as banks, building societies or credit unions, although such institutions are highly unlikely to charge interest rates of anywhere near 48 per cent.

What is credit history?

Your credit history covers everything to do with applying for loans. It includes the number of loans you’ve applied for, the amounts you’ve borrowed and your record of meeting repayment schedules.