Anyone intending to be buying a home in the near future needs to keep in mind that that outstanding debts will affect your ability to qualify.
While you may be aware that your personal loans and credit card balances will reduce your borrowing capacity, you may not realize that the following will also affect how much you will be allowed to borrow:
Lenders will use your income to service the full loan amount even if you are only a 50% borrower. If you already have a property with a sibling where you own the house 50/50 and have a joint mortgage, when you go to apply for a home loan, the lender will assume that you have 100% responsibility for your investment loan and will only qualify you for whatever loan you can afford after your income is applied fully to service existing loan. The reason for this is quite simple – if one of the two borrowers stops paying, the other will be responsible for the full loan. Any new lender that assesses your affordability will always assume the worst.
Any personal guarantees that you may have given for a family member of friend will similarly affect your loan affordability. Lenders will assume that you have to repay this debt if it goes bad (even if the loan is not yours but you are merely a guarantor).
Borrowers who have several credit cards with high limits need to understand that any potential lender will be assessing your mortgage affordability assuming you have fully drawn all your credit cards to the maximum. That will be the case even if you do not use some of your credit cards and always pay out all credit card debt in full every month.
Therefore if you have $80,000 worth of available credit on your cards, a potential lender will assume you have a credit card debt of $80,000. That is a very high credit card debt to service on any income and can affect your ability to borrow the amount that you can in fact afford. If you know you are about to apply for a mortgage, close the credit cards that you do not use or need to reduce your exposure to debt.
Tertiary students can can borrow to pay for their education via the Higher Education Loan Program (HELP). This is known as your HECS debt. You do not have to repay these debts unless and until your income exceeds a level specified.
Today that sits at around $50,000. Some first home buyers may have forgotten that they have a HECS debt. This will however need to be disclosed to your potential lender so that they are able to estimate how your current income is going to be affected by this loan.
People sometimes forget that being in a debt agreement at the time that you make any loan application will affect your ability to qualify. If applying for a home loan, lenders will not view a debt agreement as they would any other loan. They will want you to repay the agreement in full before any mortgage can be approved.