What a bank sees when you have a HECS debt, a car loan and a credit card.

When a lender assesses how much you can borrow, they are not just looking at your income. They are looking at your existing commitments, and three of the most common ones are a HECS debt, a car loan, and a credit card. Each one reduces your borrowing capacity, but they do it in different ways and to different degrees. Understanding the difference is the first step to doing something about it.

The thing that catches people out is that a credit card with a zero balance can reduce your borrowing capacity just as much as one that is maxed out. The lender does not care what you owe on it. They care about the limit, because that is what you could owe tomorrow.

HECS debt, and why it is not the same as other debt

A HECS or HELP debt is different from other debts because it is not a conventional loan. You do not make repayments on it unless your income is above the threshold, and the repayment amount scales with your income. A lender treats it as an ongoing commitment, and it reduces your borrowing capacity accordingly.

Some lenders have started to take a more flexible view of HECS, particularly where the balance is low and close to being paid off. If your HECS is almost cleared, it may be worth asking whether paying it out with savings is the right move. Reducing or eliminating the HECS obligation can increase your borrowing capacity, and sometimes the increase in what you can borrow is worth more than the cash you used to clear it.

The decision to pay out a HECS debt early is not straightforward, and it depends on your numbers, your savings buffer, and what you are trying to buy. It is a conversation worth having before you apply rather than after you have been told your borrowing capacity is lower than you expected.

Car loans, and the monthly cost

A car loan is straightforward in how it affects borrowing capacity. The lender looks at the monthly repayment and reduces what you can borrow by a multiple of that amount. A $600 per month car repayment can reduce your borrowing capacity by tens of thousands of dollars, depending on the lender and the interest rate buffer they apply.

This is where consolidating personal loans into a home loan structure sometimes comes up. If you have a car loan at a higher rate and you are buying or refinancing a property, rolling the car loan into the mortgage can reduce your monthly commitments and increase your borrowing capacity. It is not always the right call, because you are stretching a short term debt over a longer period and that can cost more in total interest. But if borrowing capacity is the constraint rather than the rate, it can be the move that gets you over the line.

Credit cards, and the limit you are not using

A credit card affects your borrowing capacity based on the limit, not the balance. A lender assumes you could draw the full limit at any time, so they reduce your borrowing capacity by a percentage of that limit regardless of whether you carry a balance. A $10,000 credit card limit can reduce your borrowing capacity by $30,000 to $50,000 depending on the lender.

If you have a credit card you rarely use, or one with a limit well above what you actually need, reducing the limit before you apply is one of the simplest ways to increase borrowing capacity. It costs nothing, it takes a phone call, and the effect can be significant. Some people are surprised by how much a card they barely use is costing them in borrowing power.

What I would suggest

If you are planning to buy in the next few months and you have any of these three, it is worth looking at them before you apply rather than after. A HECS debt, a car loan, or a credit card limit can each be the thing that caps your borrowing capacity below what you need, and sometimes the fix is straightforward.

If part of the reason you are holding off is the market itself, I have written about what the current fall in mortgage demand means for buyers, and why a quieter market can suit someone who is ready.

Give me a call and I can look at your situation and tell you which of these is costing you the most borrowing capacity, and whether there is something worth doing about it before you apply. Ten minutes is usually enough to know.