Mortgage broker warns car loans could cost young Australians a home as government scheme is uncapped

A Sydney mortgage broker warned that young Australians who take out loans to buy new cars risk pricing themselves out of the housing market as the federal government expands its first-home buyer support.

Julian Finch, chief executive of Finch Financial, said car loans add hundreds of dollars to monthly financial commitments and can sharply reduce a buyer's home loan approval capacity at a time when demand for property is expected to rise.

The Albanese government's home guarantee scheme, which allows eligible first-home buyers to purchase with a five percent deposit and have the remaining 15 percent guaranteed by the government to avoid lenders' mortgage insurance, will be uncapped from Oct. 1. The scheme had been capped at 35,000 places a year. Lenders determine home approval capacity by assessing an applicant's ability to service monthly mortgage repayments alongside existing debts and ongoing living costs.

"Car loans are toxic for borrowing power," Finch said. "I've seen clients lose up to $150,000 in home loan approval capacity simply due to financing a new set of wheels." He said a borrower with a car loan faces higher monthly commitments and that banks also factor in ongoing running costs such as insurance, registration, fuel and maintenance.

Finch and other brokers expect the uncapping of the guarantee to increase competition among first-home buyers because more people will become eligible for the concession. That, in turn, could put upward pressure on prices, brokers warn, making borrowing capacity a more decisive factor for prospective buyers.

Finch advised prospective buyers who plan to enter the market soon to prioritise saving for a home deposit and to delay financing a new car. He said purchasing a house first and then arranging vehicle finance typically has a smaller impact on the borrower's credit profile and may secure more favourable interest rates for the car loan.

For those who need transport, Finch recommended buying a low-cost, reliable second-hand vehicle outright so the car is treated as an asset rather than a debt in lending calculations. He said borrowers who do not intend to buy a home in the next five years can consider a car loan but should ensure it is paid off before applying for a mortgage.

Finch also highlighted the broader effect of unsecured debts on borrowing capacity, citing a client in Queensland with more than a dozen unsecured loans who had to refinance an investment property to consolidate debts. Credit cards and personal loans, he said, can similarly erode the amount a lender is willing to lend.

The warning comes as brokers and lenders prepare for changes in demand that the uncapped guarantee may prompt. Analysts and mortgage professionals caution that while government guarantees can lower upfront costs for eligible buyers by avoiding lenders' mortgage insurance, they do not change how lenders assess ongoing serviceability of loans.

Finch urged buyers to adopt disciplined saving strategies and to scrutinise discretionary spending. "You don't need 10 different streaming subscriptions all at once," he said, and suggested borrowers shop around for better car insurance deals rather than automatically accepting renewal quotes.

The uncapping of the scheme represents a policy shift intended to broaden access for first-home buyers, but lenders' reliance on serviceability tests means that household-level decisions about debt and spending will remain central to whether applicants can secure mortgage approval.