Mortgage broker warns car loans could cost young Australians a shot at houses as home guarantee expands

Young Australians who take out loans to buy new cars risk reducing their home loan borrowing capacity and missing out on properties as the federal government expands its first-home buyer guarantee, a Sydney mortgage broker warned.

The Albanese government will remove the annual cap on the First Home Guarantee from Oct. 1, allowing an unlimited number of eligible first-time buyers to purchase with a five per cent deposit while the government covers the remaining 15 per cent of the usual 20 per cent deposit target, a move aimed at avoiding lenders' mortgage insurance. Lenders calculate home approval capacity — commonly called serviceability — by assessing an applicant's ability to make monthly mortgage repayments against existing debts, and finance for cars, credit cards and personal loans can materially reduce that capacity.

Julian Finch, chief executive of Finch Financial, told the Daily Mail he had seen clients lose as much as A$150,000 in home loan approval capacity simply because they took out car loans. "We're in a situation where the property market is about to explode," Finch said, adding that uncapping the scheme would increase the number of competing buyers and push prices higher. "Come October 1, buyers are going to be competing with an unlimited number of others who will be eligible for the government scheme, which will drive up prices. So people need to maximise their borrowing capacity, because if they've got other loans, it's going to significantly lower their capacity."

Finch said banks treat car loans as monthly liabilities that reduce the amount they are prepared to lend for a mortgage. New cars typically depreciate immediately after purchase, unlike residential property, which many buyers expect to appreciate over time. Finch advised prospective homeowners to prioritise saving for a home deposit rather than financing a new car.

For buyers who need a vehicle to commute, Finch recommended purchasing a cheap, reliable second-hand car outright so the vehicle is treated as an asset rather than a liability on credit assessments. He said those not planning to buy property within five years could take out a car loan but should ensure it is paid off before applying for a home loan to avoid detrimental effects on mortgage approval and interest-rate outcomes.

Hidden ongoing costs associated with vehicle ownership — including insurance, registration, fuel and maintenance — are typically factored into lenders' assessments of applicants' living expenses and can further reduce borrowing capacity, Finch noted. He also warned that unsecured debts such as credit cards and personal loans can have a significant impact. "I have a client in Queensland who had one of the worst credit files I've ever seen, with 15 unsecured credit loans," Finch said. That client had to refinance an investment property to consolidate outstanding debts.

The federal First Home Guarantee, introduced to help first-home buyers enter the market with a lower deposit requirement, had previously been capped at 35,000 places a year. With the cap removed, analysts and some brokers expect heightened competition among first-home buyers and upward pressure on prices in many markets. Lenders' mortgage insurance, which is usually required when buyers have deposits of less than 20 per cent, will not be necessary for those accepted into the guarantee, reducing one upfront cost for eligible purchasers.

Industry and market watchers say serviceability assessments are becoming a more central factor for prospective buyers amid tightening credit conditions and higher interest rates compared with recent years. Mortgage brokers routinely advise clients to reduce discretionary borrowing and manage unsecured debt to improve the likelihood of loan approval and access to more favourable rates. Finch specifically urged younger buyers to reconsider non-essential recurring expenses, such as multiple streaming subscriptions and complacent renewals on car insurance, as part of a disciplined savings strategy.

Banks and lending institutions calculate how much they will lend based on applicants' documented income, expenses and outstanding debt obligations. That process includes stress-testing mortgage repayments against higher interest-rate scenarios, which can further limit borrowing capacity for applicants carrying other loans.

As the scheme change takes effect in October, prospective first-home buyers will face a market in which a larger pool of buyers can enter with smaller deposits, making borrowing capacity — and the debts that reduce it — a critical determinant of who secures properties. Mortgage brokers and financial advisers are urging buyers to plan borrowing and asset purchases with timing and serviceability in mind to avoid being priced out of intended purchases.