Owing tax debt can be stressful, especially if you’re not sure how it will impact your future. One common question people have is whether or not they can still get a home loan.
The short answer is yes, you can potentially get a home loan in Australia even if you owe a tax debt, but it may be more challenging. Having money owed to the ATO is not an idea situation, but it does not mean you can’t get a home loan. When reviewing your application for a home loan, lenders will take into consideration your tax debt as well as other debts and liabilities. They’ll also look at your history of repaying debt and other financial circumstances when making their decision.
How owing tax debt can impact your home loan application
While owing taxes doesn’t automatically disqualify you, it can impact your ability to secure a home loan in several ways:
- Debt-to-income ratio: Tax debt increases your overall debt burden, which may affect your debt-to-income ratio.
- Credit score: The Australian Taxation Office (ATO) can report certain tax debts to Credit Reporting Bureaus, potentially lowering your credit score.
- Lender perception: Some lenders may view tax debt as a sign of financial stress, making them more cautious about approving your loan.
Mortgage lenders will want to see that not only can you afford the monthly repayments, but also any other debts or liabilities such as car loans, personal loans or credit cards. Remember that different lenders have varying policies regarding tax debt, so it’s essential to shop around and explore your options.
What about the tax debt itself?
Owing a significant amount of money in taxes to the ATO can also become a factor that hinders your mortgage application. You will most likely have to provide specifics about any outstanding tax debts, as well as any payment plans you’ve already agreed upon when filling out a mortgage application.
You don’t necessarily need to pay off your entire tax debt to be approved for a home loan in Australia, but addressing the debt can significantly improve your chances of approval.
The impact on your credit score
If you have an outstanding tax debt, it could be reflected on your credit score- along with other legal debts. This ATO is taking action against many people right now, and if you’re one of them a court judgement will appear on your file. In the future, this might make it harder to get approved for things like home loans as lenders sees judgments as high-risk.
Always remember that not every tax bill will show on your credit report. If, for example, the debt is from an accountant’s mistake or from a one-time event such as selling a property and having to pay capital gains taxes, some lenders may not view you as high-risk borrower. It varies by lender how they handle home loans when the borrower has outstanding debts.
Improving your chance of a home loan with a tax debt
There are a number of things you can do that will improve your chances of being approved for a home loan, even with a tax debt. These include:
- Enter into a payment plan with the ATO, which can be viewed more favorably by lenders.
- Demonstrate a stable income and healthy savings to offset the impact of the tax debt.
- Seek professional advice from a mortgage broker or financial advisor specializing in home loans.
- Consider non-bank lenders who may be more willing to accommodate borrowers with tax debt.
If you anticipate that your mortgage application might be impacted by tax debt or other outstanding liabilities, it would be advantageous to contact a mortgage broker. These home loan experts can offer advice on the best home loan options for your particular financial situation. They can also negotiate with lenders, provide access to exclusive deals not regularly advertised, and manage the application process from start to finish.
While paying off your tax debt entirely before applying for a home loan would be ideal, it’s not always necessary or possible. The key is to demonstrate that you’re actively managing your tax debt and have the financial capacity to handle both the tax payments and potential mortgage repayments.
