Tidy Your Debts So Lenders Say Yes To Your Home Loan

Getting a home loan approved when you have business commitments is absolutely possible, but you can’t ignore your debts. Managing personal and business debts before applying means reducing or restructuring high-impact facilities, cleaning up your credit conduct, and clearly separating business and personal obligations so lenders are comfortable you can afford the loan even if rates rise or your income dips.

In practice, this week you should: (1) list every personal and business debt, (2) cut unnecessary card limits and BNPL, (3) sort ATO and tax issues, and (4) only then consider debt consolidation. The aim is to lower your assessed monthly commitments, not just shuffle balances around.

Start by mapping every personal and business debt in one place.

1. Why your debts matter so much to home lenders

1.1 How banks measure your commitments

When a bank assesses your home loan, they care less about the size of each debt and more about the monthly repayment they must use in their calculator.

They typically look at:

• Actual or assessed repayments on each loan, card or facility.
• Credit card and overdraft limits, not just balances. Many lenders assume 3–4% of the limit as a monthly commitment.
• A serviceability buffer – APRA expects banks to check you can afford repayments if rates were at least 3% higher than today.
• A minimum living expense benchmark (HEM) plus your declared expenses.

So if you have a $20,000 card with only $2,000 owing, the bank might still plug in a $600–$800/month ‘repayment’ in the calculator. Multiply that across a few cards and you can lose tens or even hundreds of thousands of dollars of borrowing capacity.

1.2 Personal vs business debts – what really counts

For self-employed borrowers and company directors, the line between personal and business debt is blurry.

Most Australian lenders will:

1. Treat any facility with a personal guarantee as your personal commitment, even if it’s ‘business use’ and paid from the business account.
2. Include vehicle loans, leases and novated leases in your personal commitments, even when the car is used largely for work.
3. Look closely at overdrafts, business credit cards and trade creditors if they are consistently at or near limit.
4. Ask about ATO debts – and generally expect either no debt or a formal, well-conducted payment plan before approval.

That’s why tidying your “business debts” is just as important as paying attention to your personal cards and loans.

1.3 Why income volatility makes debt more dangerous

Because APRA’s 3% buffer applies to whatever rate you pay, self-employed borrowers with variable income feel the impact more. A bank might test a 6% actual rate at 9% in their calculator.

If your income can move 30–50% year to year, every extra dollar of fixed monthly repayments bites harder. Reducing high-impact, non-productive debts is one of the fastest ways to offset that volatility and still qualify for the loan you want.

For more on how banks read your numbers, see How Banks Read Your Business Financials Before a Home Loan.

2. Map your debt landscape in one sitting this week

You can’t manage what you haven’t listed. Block out 60–90 minutes and get everything in one place.

2.1 Create a master list of all debts and facilities

Gather:

• Personal: home loan, investment loans, personal loans, HECS/HELP, credit cards, store cards, BNPL, personal overdrafts.
• Business: overdrafts, credit cards, equipment or vehicle loans, lines of credit, trade finance, merchant cash advances, ATO payment plans.

For each, note:

• Lender or provider.
• Whose name it’s in (personal, company, trust).
• Limit and current balance.
• Interest rate (approximate is fine).
• Minimum or actual monthly repayment.
• Whether there’s a personal guarantee.

You’ll quickly see how many small, high-interest or barely-used facilities you’re carrying.

2.2 Spot the high-impact “debt killers”

From a home loan perspective, the worst offenders are usually:

• Credit cards and personal overdrafts – assessed on limit, often at 3–4% per month.
• BNPL and consumer finance – many lenders now treat these as ongoing commitments, and frequent small transactions clutter your bank statements.
• Short-term personal loans – big monthly repayments with only a small remaining balance.
• Maxed-out business cards or overdrafts – especially where you’ve given a personal guarantee.

These are the ones to attack first. Revenue-generating business loans on sensible terms usually hurt you far less than a wallet full of unused plastic.

For a deeper dive into how each debt type hits your borrowing power, read Business Debts, Credit Cards and Car Loans: Protect Your Borrowing Power.

2.3 Check and clean your credit reports

Next, order a copy of your personal credit report from all major bureaus. Look for:

• Incorrect defaults or enquiries.
• Old facilities that should be closed.
• Payment history issues on cards, phones and utilities.

As a small business owner, your personal credit file is often used for both home loans and many business facilities. Fixing errors, catching up any late payments and closing dead accounts can quickly improve how you look on paper.

Our step-by-step guide, Clean up your credit file as a small business owner this week, walks through this process in detail.

A smarter structure can reduce monthly commitments without starving your business of cash.