Saving for a house deposit requires motivation and discipline — trying to save while paying off debt is even harder! But it’s also important to put your best foot forward when making a home loan application. So is it better to pay your debt off first, or focus on saving for a deposit?
It’s common these days for potential first-home buyers to have acquired debt before taking on their first mortgage — whether it’s a student loan, vehicle finance or credit card debt, it’s how you manage that debt that’s important.
Lending criteria has become a lot stricter with the introduction of the responsible lending code. When a bank assesses your mortgage application they need to be sure you can afford to make the loan repayments and keep on top of your living costs. Any existing debts you have when you make a mortgage application will affect the amount you are able to borrow, as your ability to honour those debts, as well as your home loan payments, needs to be considered.
By aiming to reduce your debt as much as possible you can increase your borrowing capacity when you apply for a mortgage. If you are paying 10 percent of your income towards your student loan, for example, this could potentially reduce the amount a bank might lend you by around $100,000. But if you are debt-free (or close to it), it illustrates to the bank how you can manage your finances well to achieve your goals.
Becoming debt-free can be easier said than done! The first place to start is getting a clear picture of your financial situation — knowing where your money is going and what’s left over at the end of the week, or month. Then you can break down what you need to focus on and set yourself some financial goals. Getting your bank transactions tidied up will help further down the track with your mortgage application too. We have more tips on that here.
Some debt is considered ‘better’ than others. If your loan payments are manageable, and you have a good payment history, having a small debt to pay as well as a home loan may not be considered a significant risk by the bank.
The main thing is to ensure you declare any existing debt you have in your mortgage application. Any undeclared debts are likely to be discovered during the assessment process and intentionally concealing information can result in the bank declining your application, even if you meet their affordability criteria.
Debt-free or not, Pope & Co. Mortgages can give you expert advice on your scenario and help you get ready for the mortgage application process so you are presenting yourself in the best possible way. Talk to one of our friendly team today.
Disclaimer: Please note that the content provided in this article is intended as general information only, not personal financial advice. While care is taken to ensure accuracy and reliability, the information provided is subject to change and may not represent current industry practice. We recommend you seek professional advice from a financial adviser.