I had a client tell me recently she’d been putting off applying for a mortgage for two years. She had a student loan and figured that alone would kill her application. It didn’t come up as an issue at all. Meanwhile, a much smaller personal loan she’d forgotten about made a bigger difference to what she could borrow. Debt isn’t one thing. Lenders don’t treat it as one thing either.
Why “all debt is bad” is outdated advice
The blanket advice to clear every debt before you even think about a mortgage comes from a good place. But it misses the point. What actually matters is the type of debt, what it’s secured against, and how it behaves in a servicing calculation. Some debt barely moves the needle. Other debt moves it a lot.
Lenders don’t just add up your balances and subtract them from your income. They look at how each debt is structured. Revolving debt, like credit cards, tends to get treated differently to a fixed-term loan with a set repayment schedule. The interest rate matters too, and so does whether the debt is secured against something or sitting there unsecured. All of that shapes how much weight a particular debt carries in an application. That’s long before anyone even looks at the balance itself.
What makes debt “good” in a lender’s eyes
Generally, debt that’s low cost and well managed tends to be viewed favourably. That’s especially true when it’s tied to something that builds value over time. Think student loans, or a mortgage on a property that’s appreciating. It shows a track record of borrowing responsibly and meeting repayments, which is exactly what a lender wants to see.
A student loan often falls into this category for a different reason too. It’s not tied to an asset in the traditional sense, but it’s tied to future earning potential. The idea is that the education behind it increases what you’re likely to earn over time. That’s why lenders can view it more favourably than debt with nothing productive behind it. A mortgage on an appreciating property works on a similar principle, just with a physical asset instead of a qualification. The debt exists, but so does something building value alongside it, and that changes how it’s weighed.
What makes debt “bad” (high interest, short term, no asset behind it)
Debt that’s high interest, short term, and not attached to anything of lasting value tends to work against you. Think credit cards, buy-now-pay-later, some personal loans. It’s not just the balance. It’s what it signals about spending patterns, and how much it eats into your monthly capacity to service a mortgage.
The difference comes down to what the debt is actually doing. An asset, even one bought with debt, has the potential to hold or grow in value over time. In some cases, it can produce income of its own. A liability doesn’t do either of those things. It just sits there costing you money in interest, with nothing building up behind it. That’s the core distinction lenders are drawing, even if they never say it in those words. Debt used to acquire something of lasting value gets read differently to debt used to fund day to day spending. One is building a position. The other is chipping away at your ability to service future repayments.
How this plays into your servicing calculation
When a lender assesses an application, they’re not just looking at your income. They’re working out what’s left over after your existing commitments. Then they apply their own view of what a mortgage repayment would realistically cost you on top of that. Every dollar of minimum repayment on existing debt reduces what they’ll consider you can service. This is why two people with identical incomes and different debt can end up with very different borrowing capacity.
The way each type of debt is counted also varies. Revolving credit, like a credit card or an overdraft, gets assessed on the full limit rather than what’s currently owing. That’s because the full amount could be drawn down at any time. A structured loan with a fixed term and a set repayment tends to be viewed more predictably. The lender can see exactly how it behaves over time. Lenders also build in a buffer. They test what repayments would look like if interest rates moved higher. That means the debt you’re carrying now gets measured against a more conservative version of the future, not today’s numbers.
A quick self-check: sorting your own debts into each bucket
Have a look at what you’re currently carrying. For each one, ask three questions. What’s the interest rate? Is it tied to anything of value? Have you managed it well? Those three questions roughly map to the same things a lender is weighing: cost, security, and track record. None of them exist in isolation. A lender is really looking at how they combine, not any single factor on its own. That’s a rough but useful way to see how a lender might view your overall position. It also shows you where your energy might be best spent if you’re planning ahead.
This article is general information only and doesn’t take into account your personal financial situation, goals, or needs. It shouldn’t be treated as financial advice or confirmation of a specific lending outcome. For guidance specific to your circumstances, talk to a licensed financial adviser.
Want to know what this actually means for you?
This is general education, but your situation isn’t general. Want to go through your own debt and what it means for your borrowing power? I’m happy to have that conversation. As a mortgage adviser operating under Guardian Smith’s FAP (FSP1002543, individual registration FSP1012174), I can walk you through it properly. No obligation.
Call 0226584350 or email chris@guardiansmith.co.nz to book a time.
— Chris Thompson
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