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What your debts are costing you when house hunting

Purchasing an investment property is exciting. It’s a process signifying prosperity, excitement, and success. What I’m sure comes to mind is the fact that it’s a huge milestone- a whole life’s savings can come together to achieve this enormous goal. But maybe you need a little bit of help. You might approach the bank for a loan, no big deal.

What probably doesn’t come to mind is how greatly your personal loan, car loan and credit card debt are going to affect your borrowing capacity.

The facts:

New data from a survey by finder.com.au is showing that the average Australian has a car loan sitting at $16,320 on average, a personal loan of $12,643 and credit card debt of approximately $3,114. Which is fine- this can be paid off over time, no big deal. But what if you’re thinking of moving soon and you need a bit of help with it?

Unfortunately, the bank won’t like your debt so much.

Statistics from the Reserve Bank of Australia Credit and Charge Card Statistics are demonstrating that if an individual Australian has the average credit card debt of $3,114, their borrowing capacity will be immediately reduced by $12,000. This is over three times more than the actual debt itself, which is potentially a huge detriment.

If your average personal loan is $12,643, your borrowing power will be lessened by $41,000, which is also over three times more. If you add up the average Australian’s personal loan ($12,643), car loan ($16,320) and credit card debt ($3,114), Australians are looking at being denied over $99,000.

Generational trends:

Finder’s research shows that Millennials on average have the least amount of total debt, with $29,191 still reducing their borrowing capacity by $97,000. Generation X has the second most, with an average debt of about $36,821, which affects their borrowing power by a huge $121,000, and Baby Boomers are the most in-debt generation, with $41,472 affecting their capacities by $129,000.

This is a huge statistic. It’s clear by far that Baby Boomers are the most at-risk generation when applying for home loans, with the most credit card, personal loan, and car loan debt on average out of all of the generations.

What action can you take?

Australia’s average property price sits at $612,000, so even the smallest reduction in your borrowing capacity can have an affect on your chances of purchasing a house you’d feel comfortable in.

Before taking out a loan application or even approaching a bank, try to eliminate all of your debts as much as possible. If you pay off your credit card, this will have a hugely positive effect on you in the long run.

You can also take steps such as redirecting part of your salary into a savings account with a high interest, or physically yourself make transfers yourself as much as you can. Or, if you’re not sure where to go, try checking out a credit card comparison site. The less financial baggage you have when you approach a lender, the better chance you have of taking out a better loan that can ultimately contribute positively towards your new home or property.

Remember that your finances are in your hands, so try to take as many steps as possible to knock off your debts before you take any action. Your new investment property will thank you for it.

By Michelle Hutchison,

Money Expert at finder.com.au

 

The Successful Investor has a trusted network of financial planning and mortgage experts we can refer investors to. For more information call 1300 800 886 or email us.