This is an illustrative example based on common patterns seen in home lending — not a specific individual’s story.
Key takeaway: Lenders assess liabilities by their full available limit, not the balance owing — a car loan or credit card can quietly cost more borrowing power than the mortgage repayment itself, simply because of how the ongoing commitment is calculated.
Consider a couple — we’ll call them Josh and Amy — applying for a $480,000 home loan while still paying off a $28,000 car loan with two years remaining. They assumed the car loan, being far smaller than the mortgage, would barely register. It ended up reducing their approved loan amount by more than the value of the car itself.
This is one of the most common surprises in a lending assessment, because people naturally compare debts by their size relative to the loan they’re seeking — a car loan feels tiny next to a half-million-dollar mortgage. A lender’s math doesn’t work that way.
The Problem Wasn’t the Loan Size — It Was the Monthly Commitment It Represented
- The car loan’s $520 monthly repayment was factored directly into their serviceability calculation as an ongoing, fixed commitment — reducing the income left over to service a mortgage by that amount every month for the remaining two years of the loan.
- Because mortgage serviceability is calculated over the full loan term, even a debt that finishes in two years still counts at its full monthly repayment today, not a reduced or averaged figure.
- On top of the car loan, an unused credit card with an $8,000 limit was assessed at its full available limit, not its near-zero balance, adding a further hypothetical monthly commitment the lender had to account for.
What Typically Changes the Outcome
- Paying out a car loan or other fixed-term debt entirely before applying, where that’s genuinely affordable, rather than continuing to service it alongside a new mortgage application
- Reducing credit card limits to what’s actually needed day-to-day, since a lower limit directly reduces the hypothetical liability a lender has to factor in
- Getting a clear picture of total liabilities — limits, not balances — before estimating borrowing capacity, so there are no late surprises once a lender runs the full numbers
The Realistic Result
In scenarios like this, clearing a car loan and trimming an unused credit card limit before applying commonly restores tens of thousands of dollars in borrowing capacity — often more than the value of the debts being cleared, because the calculation is driven by ongoing commitment, not remaining balance.
The Actual Lesson
A small debt next to a large mortgage can still meaningfully shrink what a bank is willing to lend, because the assessment is about ongoing monthly commitment and available credit, not relative size. Reviewing every existing liability — including unused credit limits — before applying is one of the highest-leverage things a borrower can do with zero change to their actual income.
Written by Michael Wignall, who’s spent 30+ years in banking and home lending across the ACT, Illawarra, and Riverina regions of NSW.
