How Short-Term Debt Impacts Your Mortgage And How to Get Around It
Mortgage Express
Mortgage Resource
2 months ago
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When applying for a mortgage, most home buyers focus on the big things like saving for a deposit or maintaining a steady income. But there’s another important factor that can significantly affect your ability to secure a home loan: short-term debt. Whether you’re a first home buyer or an existing homeowner, understanding how short-term debt impacts your mortgage is essential for improving your chances of getting mortgage approval and managing your mortgage repayments successfully.

How short-term debt affects your mortgage

Many home buyers don’t realize that even small debts can have a big impact on a mortgage application. Whether it’s a few credit cards with low balances or a small personal loan, short-term debts reduce your borrowing capacity.

When assessing a mortgage application, lenders will look at these debts and consider how much they reduce your ability to repay a mortgage. Having too much short-term debt can make you seem like a riskier borrower.

For first home buyers, that can mean the difference between getting approved or being turned down for a home loan, while for existing homeowners, short-term debt can impact your ability to meet your mortgage repayments, especially if your financial situation changes.

Understanding short-term debt

Let’s break down some common types of short-term debt and how they can impact a mortgage application:

  • Credit cards. Often underestimated, especially if you’re paying off the balance every month, lenders view the credit limit on all of these cards as potential debt. For example, if you have a card with a $20,000 limit, the bank considers that you could owe $20,000 at any time. This perceived debt reduces your borrowing capacity, and if your income isn’t high enough to service both the credit card and a home loan, you may need to reduce your credit limits.
  • Car loans and personal loans. It can be tempting taking out a loan to buy a car or other big-ticket items, but this type of debt can seriously impact a mortgage application. Every dollar used to repay your debts is money that isn’t going into repaying your mortgage. And, since the item you’re financing typically depreciates in value, there’s no real security for lenders.
  • Student loans. This type of short-term debt is a little different. While it’s still considered a debt, most lenders view student loans as less financially risky. However, having a student loan could still impact your borrowing power because it reduces your income. So paying it off quickly or making consistent repayments will improve both your credit score and your chances of getting a home loan.
  • Buy-Now-Pay-Later Services (e.g., Afterpay). While these services may offer convenience, they can seriously hurt a mortgage application. That’s because lenders view BNPL as high risk, so if you’re using Afterpay or similar, it’s worthwhile getting rid of this type of debt as soon as possible.

Managing short-term debt to improve a mortgage application

If short-term debt is impacting your ability to get a mortgage, there are several strategies you can use to manage it and improve your financial situation.

  • Pay it off quickly. The sooner you can pay off short-term debt, the better, as every bit of debt you eliminate will improve your borrowing capacity.
  • Stop taking out new debt. Using credit to buy items could signal to lenders that you struggle to manage your money. Instead, focus on saving and reducing existing debt.
  • Save up to buy. That way you can buy items guilt-free, without impacting your ability to secure a mortgage.
  • Consolidating debt. Simplify your financial commitments by consolidating multiple debts into one manageable repayment to show lenders that you’re taking a responsible and proactive approach towards managing your debt.

Get expert advice from Mortgage Express

Having short-term debt doesn’t mean the end of your home ownership dreams. Get help navigating the challenges of debt management and mortgage approval, with expert advice from the team of mortgage advisers at Mortgage Express.

Whether you need advice about refinancing to consolidate debt or preparing a strong home loan application, get in touch with a Mortgage Express adviser today to find out how we can help you.