Mortgage broker warns car loans could cost young buyers access to government-backed home purchases
Uncapped expansion of home guarantee scheme from Oct. 1 will heighten competition and makes borrowers' existing debts, including car finance, a larger determinant of approval capacity, broker says
A leading Sydney mortgage broker warned that young Australians taking out car loans risk losing the borrowing capacity needed to secure a home as the Albanese government expands its first-home buyer guarantee scheme on Oct. 1.
The scheme, which allows eligible first-home buyers to purchase a property with a five per cent deposit while the government covers the remaining 15 per cent to avoid lenders' mortgage insurance, will be uncapped from Oct. 1 after previously being limited to 35,000 applicants a year. Julian Finch, chief executive of Finch Financial, said the removal of the cap will increase competition and could push property prices higher.
"We're in a situation where the property market is about to explode," Finch told the Daily Mail. He said lenders calculate home approval capacity on an applicant's ability to make monthly mortgage repayments when existing debts are taken into account, and that motor-vehicle finance is particularly damaging to that calculation. "Car loans are toxic for borrowing power," he said, adding that he had seen clients lose as much as $150,000 in home loan approval capacity because they had financed a new car.
Finch said banks incorporate not only the car loan repayment but also ongoing running costs such as insurance, registration, fuel and maintenance when assessing creditworthiness. For prospective buyers who need a vehicle, he advised purchasing a cheap, reliable second-hand car outright so that the vehicle is treated as an asset rather than a liability by lenders.
He also recommended that those not planning to buy within five years avoid taking on a car loan, or ensure any vehicle finance is repaid before applying for a mortgage. Finch said buying a home first and financing a car afterwards typically has a smaller impact on mortgage approval and may yield better interest rates on the car loan, because banks view homeowners as lower credit risk than renters or those living at home.
Other forms of unsecured debt can also reduce borrowing power. Finch cited a client in Queensland with about 15 unsecured credit facilities who had to refinance an investment property to consolidate those obligations. He urged would-be buyers to maintain a savings plan, cut unnecessary expenses and shop around for better insurance and service deals to improve their credit profiles ahead of mortgage applications.
The government-backed scheme is intended to help first-home buyers enter the market with smaller deposits by avoiding the additional cost of lenders' mortgage insurance. Industry analysts and brokers have said that making the scheme uncapped could increase demand among first-home buyers, intensifying competition in markets already characterised by low supply and rising prices.
Lenders determine approval capacity through serviceability calculations that model whether an applicant can meet repayments on a proposed mortgage while maintaining required living expenses and paying existing debts. Economists and mortgage brokers say that when a larger pool of buyers becomes eligible for a government guarantee, small differences in borrowers' debt profiles and loan serviceability can become decisive in tight markets.
Finch's warnings echo broader advice from mortgage specialists who encourage prospective buyers to minimise discretionary borrowing, resolve outstanding consumer debt and build cash savings before applying for a home loan. The finance industry continues to emphasise that consumer-credit behaviour, including car finance, credit-card balances and personal loans, directly affects the outcome of mortgage assessments.
As the Oct. 1 uncapping approaches, brokers say applicants should seek pre-approval assessments where possible and review financial commitments that could reduce their loan size. Lenders, for their part, will continue to assess applications using regulatory serviceability frameworks designed to ensure borrowers can meet long-term repayments.
The expansion of the home guarantee scheme and the expected rise in demand put pressure on buyers to align financial priorities with long-term goals, brokers say. For some prospective homeowners, delaying discretionary purchases or choosing lower-cost transport options may preserve the borrowing power needed to take advantage of government-backed opportunities in a competitive market.