Research commissioned by finders.com.au has found out that the average young home buyer already has debts amounting up to $30,000. This shrinks the amount that a bank could lend them by $100,000.
Baby boomers and Generation X have more non-mortgage debt than Generation Y, but the latter feels the impact of debt more when they look to get a mortgage.
"(Gen Y) are generally on less income as they are at the earlier stages of their careers, which means their borrowing power should be lower," said money expert Michelle Hutchison. The rule of thumb is to triple the value of one's debt to see how much less a lender is prepared to loan an individual.
According to Mortgage Choice chief executive John Flavell, lenders are particularly concerned about disposable income.
"Younger borrowers tend to take on a lot of debt, including personal loans, credit cards, car loans, and HECS debt," he said. "All of this debt serves to reduce their level of disposable income and, in turn, their borrowing capacity."
He recommends borrowers to pay off debt to increase their borrowing capacity.
"When paying off debt, it is important for borrowers to pay off debts with the highest interest rates first. Credit cards, for example, have notoriously high interest rates and can significantly impact a borrower's cash flow," he said.
Collections: Mortgage News