Does Car Finance Affect Mortgage Repayments?Published Tuesday, May 17, 2022
If you are considering purchasing a car or taking out a mortgage, you’ll want to understand how both of these payments impact each other.
Lenders review your entire financial situation when determining how much to loan you and what interest rates and fees to charge. As a result, having a car payment on top of a mortgage payment could impact the overall costs of your mortgage.
However, this impact can be positive or negative, depending on the circumstances. Read on to learn the answer to “Does car finance affect mortgage repayments?” Then contact our Westside Auto Wholesale team to discuss your car finance options.
How Does a Car Loan Impact a Mortgage Application?
When you apply for a mortgage, your lender will ask you to provide information about your financial situation. One question it will ask is whether you are currently paying back any loans or have any outstanding debt.
Lenders want to ensure that you will repay your borrowed amount within the designated time and not cause them any problems. As a result, when determining your interest on the loan, they will consider your entire financial situation and the likelihood that you would be able to make mortgage payments on time.
Your car payment plays into your total financial picture, and as such, a lender will take this payment into consideration when determining your total loan cost.
How Can a Car Loan Positively Impact Your Mortgage?
Loan repayments can impact your credit score. When you make loan payments on time, your credit score may improve. Potential lenders can review your credit score and overall credit history to predict whether you would be a responsible borrower.
As a result, if you have consistently made on-time car loan payments, lenders can see this activity and may be more likely to approve your mortgage application.
Additionally, your car loan behavior can impact your interest rates and fees on your mortgage. Typically, lenders review your credit score to determine your interest rate. If you have a lower score, you will typically face higher interest, as you pose a greater risk to the lender.
However, acting responsibly with your car loan can show mortgage lenders that they can trust you, allowing them to lower your interest rate. You can save thousands of dollars in the long run by having a lower interest rate on your mortgage.
How Can a Car Loan Negatively Impact Your Mortgage?
In the same way that having a car loan can positively impact your mortgage cost, it can also negatively affect it.
As we’ve said, your lender will review your previous financial activity to determine your loan rate. If you have failed to make car loan payments in the past, the lender may increase your interest to reduce the risk in the loan.
Additionally, your lender will review your current financial situation to gauge whether you can afford a mortgage. If you currently have an auto loan that is consuming a significant amount of your income each month, a lender may hesitate to loan you money to purchase a house.
Can a Novated Lease Affect Your Mortgage?
A novated lease is a financial arrangement where your employer takes your lease payments out of your paycheck each month. This type of lease offers an effective way to finance a car and reduce your taxable income, making it more affordable than a traditional lease in some cases.
Typically, having a novated lease will not affect your mortgage cost as much as having a traditional car payment. However, this type of lease may still impact your borrowing power, as you’ll need to report this lease when detailing your financial situation to your lender.
What Factors Do Mortgage Lenders Consider?
Your current car payment is not the only factor affecting your mortgage repayment. Before you apply for a mortgage, we recommend reviewing your entire financial situation from the same perspective a lender would. This process can allow you to understand which elements of your finances may raise your mortgage costs or inhibit you from receiving mortgage approval.
Typically, mortgage lenders will review all of the following to determine your mortgage eligibility and rates:
- All forms of income (salary, side jobs, dividends, government assistance, etc.)
- Monthly expenses (groceries, rent, utilities, insurance, subscriptions, etc.)
- Credit score and credit history
- Current debts (car loans, student loans, personal loans, credit card debt, etc.)
- How much of a deposit you plan to provide for the mortgage
- Desired repayment period (20 years, 30 years, etc.)
If you believe any of these factors would reflect poorly on your financial behavior, you may want to take some time to rectify them before applying for a mortgage. If your lender can offer you even a few tenths of a percentage less in interest, you could save a significant amount long-term on your mortgage repayments.
How Soon After Buying a Car Should You Apply for a Mortgage?
Financial experts typically recommend spacing out your major purchases, especially when they involve taking out loans.
If you’re planning to apply for a mortgage in a few years, taking out a car loan now can help you build your credit and secure a more favorable mortgage when the time comes.
However, if you need to apply for a car loan and a mortgage within the same year, we recommend at least spacing out these activities by a month or two. Attempting to apply for both loans in the same month could paint a reckless image of your financial behavior, leading to a higher interest rate on the second loan you take out.
Can Car Finance Improve Your Credit Score?
In 2014, Australia introduced positive or comprehensive credit reporting. Before this year, only your negative financial behavior contributed to your credit score. Now, your positive habits can improve your score.
As a result, taking out a car loan has the potential to improve your credit score — as long as you act responsibly. If you are trying to raise your score quickly from past penalties, financing a car and making on-time monthly payments could allow you to improve your credit score relatively quickly.
Your lender will report your payments to the credit bureaus each month. As a result, every on-time payment you make has the potential to raise your score.
However, this philosophy goes both ways. If you struggled to make payments in the past and your credit score decreased, you’ll want to make sure you’re better positioned to pay back a car loan now before borrowing one. Failing to make even one payment on time could lower your credit score by several points.
Finance Your Vehicle Through Westside Auto Wholesale
Having a car loan payment you can afford plays a significant role in your eligibility for a mortgage. At Westside Auto Wholesale, we strive to provide simple, accessible financing for our customers.
When you purchase a vehicle through our dealership, we will present you with several car finance packages, allowing you to choose the option that precisely suits your needs and budget. We also offer competitive rates, allowing you to maximise your borrowing power for future loans and mortgages.
Stop by our Westside Auto Wholesale dealership today to check out our inventory and review your car finance options.