Key takeaways
- Lenders count your car-loan repayment as an ongoing commitment against serviceability.
- A few hundred dollars a month can cut borrowing power by tens of thousands.
- Clearing the car loan can lift borrowing power — if it doesn’t drain your deposit.
- Leases and novated leases can be assessed differently from a standard car loan.
Here’s the maths that surprises people: a car loan doesn’t just cost you its monthly repayment — it costs you a chunk of the home you were hoping to buy. Because home-loan borrowing power is built on your surplus income, every dollar of committed repayment is multiplied into a much larger reduction in what a lender will advance. A modest car loan can cost you a big slice of your budget.
Why the impact is so large
Lenders calculate how much you can borrow from the income left after your expenses and commitments, tested at a buffered rate over the loan term. A $500-a-month car repayment isn’t just $500 gone — it’s $500 a month that can no longer service a mortgage, which over a 30-year loan translates into tens of thousands less you can borrow. The repayment shrinks; the borrowing-power hit is amplified.
How lenders assess it
Your car-loan repayment is counted as an ongoing commitment in your serviceability assessment, reducing the income available for a home loan. Leases, novated leases and standard loans can be treated slightly differently, but the repayment is the main lever in every case. It sits alongside credit cards and buy now pay later as debts that eat into your borrowing power.
If you’re planning to buy, think twice before taking on new car finance in the year beforehand — and be cautious about a dealer’s “cheap” finance if a home is on the horizon. The repayment can cost you multiples of its value in lost borrowing capacity.
Pay it out, or keep the cash?
Clearing the car loan usually boosts your borrowing power meaningfully. The catch is deposit: if paying it out leaves you short or tips you into LMI, the gain can be cancelled out. Sometimes consolidating or restructuring is a better path. The right answer is a numbers question — and one worth getting right before you apply.
Broker Insight. Clients are often shocked how much a car loan costs them — not in repayments, but in the home they can no longer borrow for. We model that trade-off before anyone signs up for dealer finance.
Find out what your car loan is really costing you
We’ll show how much borrowing power your car finance consumes — and whether clearing it or keeping the cash gets you the better home. Free, no obligation.
Book your free game plan callFrequently asked questions
Does a car loan affect how much I can borrow for a home?
Yes, significantly. Lenders treat your car-loan repayment as an ongoing commitment that reduces the income available to service a mortgage. Because home-loan borrowing power is a multiple of your surplus income, a few hundred dollars a month in car repayments can reduce how much you can borrow by tens of thousands of dollars — often far more than the loan balance itself.
Should I pay off my car loan before applying for a home loan?
Often, yes — if you can do it without draining the deposit you need. Clearing a car loan removes the repayment from your commitments and can lift your borrowing power substantially. But if paying it out leaves you short on deposit or pushes you into LMI, the trade-off may not be worth it. It’s a balance worth modelling before you decide.
Is a car lease treated differently from a car loan?
Both are commitments that reduce serviceability, but lenders can treat leases, novated leases and loans slightly differently depending on the structure and who is liable. The repayment is the main factor either way. If your car finance is through your employer or business, how it’s assessed can vary, which is worth checking before you apply.
This guide is general information only and does not take your personal circumstances into account. It is not financial or credit advice. Government schemes, lender policies, rates and tax rules change over time and eligibility criteria apply. Speak with us for advice tailored to your situation.