Back to Inspire Home

How your debt impacts your borrowing power

Many Australians go into the property buying process with existing debt, and this doesn’t always impact on their ability to get approved for home loans. If you want to buy a home, it’s important to understand how your debt will impact on your borrowing power and approval likelihood.

Here we’ll explain what borrowing power is, as well as how student debt, personal loans, car loans, credit cards and existing mortgages can impact your borrowing capacity.

What is borrowing power?

Borrowing power is a term lenders use to describe the loan size that they are likely to approve you for, based on your financial situation. If you have a high borrowing power, it means that lenders trust you to repay a larger home loan.

Factors that can increase your borrowing power include:

  • High income, in relation to how much you want to borrow
  • Stable job
  • Low debt
  • Large deposit
  • Assets
  • Reasonable living expenses

Your borrowing power will likely be weak if you have a lot of debt, a bad credit history, a low deposit and poor financial management. Read about how to increase your borrowing power here.

Wondering how much you could borrow?

Calculate your borrowing power based on your income.

Calculate now

How student debt impacts your borrowing power

It’s very common for first home buyers to have student debt, and it generally won’t be a significant barrier towards getting a home loan. However, it can impact your borrowing power.

Having a high debt to income level can make you a less serviceable borrower, but every bank calculates serviceability differently. How your university debt is viewed will vary between lenders, and also depend on other factors such as:

  • The amount of debt
  • Your income
  • Your profession
  • Any other debts

How is HECS repaid?

Because of how university debt is structured and repaid in Australia, some lenders treat it differently to other common debts (e.g. car loans and credit cards). You start to repay HECS-HELP debt once you hit a certain income threshold and it will be automatically deducted from your wage. Unlike most other debts, interest is not charged on HECS-HELP, but it is subject to indexation.

Can I still get a home loan if I have a HECS debt?

Some lenders will treat HECS debt just like regular debt, but that doesn’t mean you won’t be able to get a home loan. This debt will simply become another consideration for your lender in calculating your borrowing power.

To improve your borrowing power you can:

  1. Pay down your HECS-HELP debt. Note that this will delay you getting into the property market.
  2. Increase your income through seeking a pay rise or getting an additional job.

If the rest of your home loan application is strong (i.e. solid income, minimal unsecured debt, stable job, healthy credit rating), a reasonable university debt shouldn’t be a major issue. For example, it’s likely that a young dentist will have HECS-HELP debt, but they are also likely to have a high and stable income that will be viewed favourably.

Want to check your HECS-HELP debt? Head to the myGov website. Here you can also make voluntary payments towards paying off the debt.

How personal loans impact your borrowing power

Personal loans can reduce your borrowing power as they are another expense that reduces how much you would reasonably be able to repay on a home loan each month. Personal loans usually attract higher interest rates, so they can take longer to repay than you might expect.

To reduce the impact of higher interest rates on unsecured debts like personal loans and car loans, you could consider debt consolidation.

One thing you can do to increase your borrowing power if you have personal loan debt is switching to a fixed rate for your personal loan. Lenders typically add a buffer of about 1.5% on top of variable interest rates to account for possible rises in the future. When they do this, your borrowing power decreases. Otherwise, focusing on paying down the debt is a smart option.

How much can you save by consolidating debt?

Roll your credit card, car or personal loans into your home loan.

Calculate savings

How credit cards impact your borrowing power

Remember that even if you repay your credit cards each month, some lenders will still view your credit card as a potential debt. So, if you have a credit card limit of $3,000 per month, a lender might see that as $3,000 of potential debt for every month.

Even if they don’t view them as a potential debt, they will likely assume that you’re reaching the full limit every month because there is a possibility that you will in the future. This is something lenders need to account for when assessing an applicant’s borrowing capacity.

If you don’t have a need for your credit cards, it might be wise to cancel them in the lead up to your home loan application process. If you still want to keep a credit card, consider reducing the limit to improve your borrowing power.

Having unpaid credit card debt will likely reduce your borrowing power, and it may be something to target before you apply for a mortgage.

How car loans impact your borrowing power

Car loans are often viewed similarly to personal loans. Both typically attract higher interest rates, due to usually being unsecured debts, and can limit your borrowing power. It might be a good idea to work on paying off your car loan debt. This will demonstrate to lenders your ability to make loan repayments and may strengthen your credit score.

Opting for a fixed rate car loan can increase your borrowing power as lenders won’t apply the buffer to protect themselves against future rises in interest rates.

Existing home loan debt

If you already own a home, this can be beneficial - even if you still have a mortgage to pay off. Depending on your loan to value ratio (LVR), you may be able to use your equity to provide a larger deposit for your next property purchase. This will increase your borrowing power and if you are receiving any rental income from investment properties, this will also help boost your application.

How much equity can you access?


Don't know your property value?
Get a free property report


Having existing debt when you want to purchase property isn’t necessarily a major obstacle. There are always ways to improve your borrowing power and if you’re having trouble, it may be worthwhile to speak to a mortgage broker. Lendi’s Home Loan Specialists are on hand to provide free expert advice, so get in touch today.

Got a home loan question? Just ask!

We're here to help. Get free expert advice at a time that suits you. Choose a time to chat with a Home Loan Specialist here

The information in this post is general in nature and should not be considered personal or financial advice. You should always seek professional advice or assistance before making any financial decisions.

Tags: interest rate, new purchase, home loan, refinance, lender, equity, debt consolidation, debt service ratio, debt to income ratio, credit score, bad credit

Check today's low rates

Tell us what you are looking for and see if you can save.

Search rates

Check today's low rates

Tell us what you are looking for and see if you can save.

Search rates
Home loan repayment saver tool

Home loan repayment saver tool

Enter a few details about your home loan and see how much you could save on your repayments

Important legal stuff

Lendi is the trading name of Lendi Pty Ltd (ACN 611 161 856), a related body corporate of Auscred Services Pty Ltd (ACN 164 638 171, Australian Credit Licence 442372). We will never sell your email address to any third party or send you nasty spam, promise.
# Quoted rate applies only to PAYG loans with LVR of 80% or less with security in non-remote areas. All applications are subject to assessment and lender approval.
Lendi is a privately owned and operated Australian business. Our mission is to change the way Australians get home loans by providing a faster, smarter and more secure home loan experience designed around the customer’s convenience and needs. Although Lendi compares over 1600 products (2,500+ products including feature and pricing variations) from more than 35 lenders, we don't cover the whole market or compare all features and there may be other features or options available to you. While Lendi is 35% owned by founders and employees, we have also been supported by some great minority shareholders including Bailador, Macquarie Bank Ltd and a number of Australian sophisticated investors.
*WARNING: This comparison rate is true only for the example given and may not include all fees and charges. Different terms, fees or other loan amounts might result in a different comparison rate. The comparison rates are based on a loan amount of $150,000 over a loan term of 25 years. Fees and charges apply. All applications are subject to assessment and lender approval. Quoted rate applies only to PAYG loans with LVR of 80% or less with security in non-remote areas. All applications are subject to assessment and lender approval.
IMPORTANT INFORMATION: Loan terms of between 1 Year and 40 Years are available subject to lender and credit criteria. Maximum comparison rate will not exceed 14.99% (see comparison rate warning above). Any calculations or estimated savings do not constitute an offer of credit or a credit quote and are only an estimate of what you may be able to achieve based on the accuracy of the information provided. It doesn't take into account any product features or any applicable fees. Our lending criteria and the basis upon which we assess what you can afford may change at any time without notice. Savings shown are based on user inputted data and a loan term of 30 years. All applications for credit are subject to lender credit approval criteria.
Made with love at Circular Quay in Sydney, Australia. © 2021. All rights reserved.