Will A Personal Loan Affect My Mortgage Application?

Can I get a mortgage if I have a personal loan?

Yes, you can still get a mortgage if you have a personal loan. Having a personal loan doesn’t automatically disqualify you from getting a mortgage. However, it can affect your eligibility and the terms of the mortgage you qualify for.

How does a personal loan affect my mortgage application?

A personal loan can affect your mortgage application in several ways:

Debt-to-income ratio

This ratio compares your monthly debt payments to your monthly income. If you take out a personal loan, it adds to your monthly debt obligations, which can increase your DTI. A high DTI can make it more challenging to qualify for a mortgage, as it may signal to lenders that you might struggle to make mortgage payments on top of your other obligations.

Currently, there is no set framework around debt-to-income ratios in New Zealand. But, the Reserve Bank has been mulling over the possibility of introducing one. In saying that, lenders are able to use DTIs of their own, should they wish to. In recent years both BNZ and ASB introduced debt-to-income ratios (at around six to seven times income).

Credit score

When you apply for a personal loan, the lender will likely check your credit, which results in a hard inquiry. This inquiry can have a temporary negative impact on your credit score. A lower credit score may affect your eligibility for a mortgage and the interest rate you’re offered. A strong credit score is crucial when applying for a mortgage.

→Related article: How a Credit Score Impacts Your Ability to Get a Home Loan

Timing

If you apply for a personal loan just before or during the mortgage application process, it could raise concerns for the mortgage lender. They may want to know the purpose of the loan and how it fits into your overall financial picture.

How your mortgage terms are affected

If you are approved for a mortgage, you may find that your mortgage terms are affected by your personal loan:

Interest rates

Your credit score and financial history play a significant role in determining the interest rate offered by a mortgage lender. If your credit score drops due to a personal loan or if the loan increases your perceived risk, you may be offered a higher mortgage interest rate.

Home deposit

Most mortgage lenders require borrowers to contribute a deposit from their own funds towards the cost of the home. However, if you use a personal loan to fund that deposit, mortgage lenders will reduce your borrowing capacity according to the size of your personal loan debt.

However, there are home loan product that specifically use personal loans to help finance the overall mortgage package, for example Squirrel’s Launchpad, for more information on this mortgage product, click here.

Repayment terms

Lenders will consider the terms of your personal loan when evaluating your mortgage application. A personal loan with a longer term and lower monthly payments might have a smaller impact on your DTI compared to a short-term loan with higher payments.

Can a personal loan improve my mortgage application?

While a personal loan can introduce some challenges when applying for a mortgage, there are potential upsides to having a personal loan in your financial history as well.

Credit mix

Mortgage lenders typically like to see a diverse credit mix on your credit report. This means having different types of credit accounts, such as credit cards, installment loans (like personal loans), and mortgages. A well-managed personal loan can add variety to your credit history and potentially have a positive impact on your credit score, which can benefit your mortgage application.

Responsible debt management

Demonstrating that you can manage various forms of credit responsibly, including personal loans, can show lenders that you are a responsible borrower. This may make you more appealing to them during the mortgage approval process.

How can I get my application approved?

To minimize the potential negative impact of a personal loan on your mortgage application, consider the following:

• Manage your debt responsibly and maintain a good credit score.
• Avoid taking on new debt shortly before applying for a mortgage.
• Consult with a mortgage lender or financial advisor to understand how a personal loan may affect your specific situation.
• Be prepared to explain the purpose of the personal loan and how you intend to manage your finances to meet both loan obligations.
• Compare personal loans to find the best options for your financial needs.

Keep in mind that the impact of a personal loan on your mortgage application can vary depending on the lender, the loan amount, your financial situation, and the current lending environment.

If you have a personal loan and want a mortgage, talk to a financial advisor to understand how your loan might affect your mortgage application and to find the best financial plan for you.

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About the author of this page

This report was written by Canstar Content Producer, Caitlin Bingham. Caitlin is an experienced writer whose passion for creativity led her to study communication and journalism. She began her career freelancing as a content writer, before joining the Canstar team.