Does existing debt affect borrowing power?
The short answer is yes, typically. The long answer is it can depend on the type of debt, as well as the size of your deposit.
When deciding on someone’s borrowing power, banks and lenders will work off the worst-case-scenario situation. They will consider all other compulsory expenses and debt servicing first. The leftover uncommitted income will then be used to test your mortgage borrowing capacity.
For example: A couple with no children, with a household income of $120,000 gross yearly and a 20% deposit, will be able to borrow approximately $720,000.
However, if this couple has $10,000 of credit card debt, their potential borrowing will look more like $640,000.
In a competitive market, that could be the difference in winning an auction.
Debt and deposits
It’s not possible to add debt onto the mortgage when using a minimum deposit (5-10%).
If you have more than a 20% deposit, you may consider reducing your deposit to exactly 20% and use the excess funds to repay the debt first. If you have between 10% and 20% you could do the same thing, however the downside of having a deposit of less than 20% is that you will be paying more interest on your mortgage, so crunching numbers is key.
Debt consolidation
Debt consolidation is when you take out one loan to pay back multiple loans. Options include credit card balance transfers, personal consolidation loans, and peer-to-peer lending options.
The final verdict
The extent to which your existing debt will affect your borrowing power will depend on your current financial situation and other factors like income, deposit, and desired purchase price. For personalised advice, seek professional expertise from a registered financial adviser.
