Mortgage broker warns young buyers: taking a car loan can cost you a home in a tightening market

Young Australians who finance new cars risk undermining their ability to secure a first home as changes to a federal home guarantee are expected to intensify demand and push prices higher, a leading mortgage broker has warned.

Julian Finch, chief executive of Finch Financial, said car loans add hundreds of dollars to monthly commitments and can sharply reduce an applicant's borrowing capacity at a time when that capacity will determine who can access an expanded government scheme for first-home buyers.

The Albanese government's home guarantee scheme allows eligible first-home buyers to purchase with a five per cent deposit while the government covers the remaining 15 per cent of the typical 20 per cent shortfall, enabling borrowers to avoid lenders' mortgage insurance. Previously capped at 35,000 places a year, the scheme will be uncapped from Oct. 1, meaning more buyers may qualify and competition for properties is likely to rise, brokers say.

"We're in a situation where the property market is about to explode," Finch said. "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."

Lenders assess loan applications by calculating whether applicants can service monthly mortgage repayments alongside existing debts. Personal loans, credit card balances and car loans are included in that calculation; recurring running costs such as insurance, registration, fuel and maintenance are also taken into account. Finch said he has seen clients lose up to A$150,000 in potential home-loan approval capacity simply because they had financed a new vehicle.

Finch advised prospective buyers to prioritise purchasing property over buying a new car. "If you get the car first and take out a loan, buying property becomes more difficult," he said. "If you buy the house first and then a car, you can still get a loan and it will have a lesser impact on your credit rating. You'll also be able to get a better interest rate on your car loan, as the banks will consider you a better risk."

For aspirants who need a vehicle before entering the housing market, Finch recommended buying a cheap, reliable second-hand car outright so the vehicle is treated as an asset rather than a debt. He said car loans are acceptable for people who do not plan to apply for a mortgage within five years, but borrowers should ensure any such loans are paid off before applying for a home loan.

Finch also highlighted the impact of unsecured debts. He cited a client in Queensland with multiple unsecured credit accounts who needed to refinance an investment property to consolidate obligations. "Credit card and personal loan debts also impact borrowing capacity," he said.

Advice from brokers includes maintaining strong savings plans, cutting discretionary expenses and shopping renewals for services such as car insurance to minimise ongoing outgoings. Those steps can improve the debt-to-income profile lenders use when assessing eligibility for mortgages.

Industry analysts and mortgage brokers say the uncapping of the home guarantee scheme could alter the dynamics of the entry-level market by increasing the pool of eligible buyers. With more applicants able to qualify for low-deposit loans, competition for affordable properties is likely to intensify, which may put upward pressure on prices in sought-after markets.

The government's change is intended to broaden access to home ownership, but brokers caution that household financial management will play a heightened role in determining who benefits. Borrowers planning to apply for a mortgage in the near term face a choice between reducing liabilities to preserve borrowing power or taking on commitments that could reduce their capacity to compete in an increasingly crowded market.

Finch urged prospective buyers to "live within your means" and warned against discretionary spending that can erode borrowing power: "It's devastating to watch someone price themselves out of the property market for the sake of a car that will only lose value."

Real-time market outcomes will depend on how many buyers move to take advantage of the uncapped scheme and on broader factors including wage growth, interest rates and housing supply. Lenders will continue to apply serviceability tests that reflect applicants' total financial commitments when deciding mortgage approvals.