“I’ve got a personal loan, so I’m guessing I’m not even close to being able to apply.” I hear a version of this most weeks. Personal loans and mortgage applications aren’t as black and white as the stigma suggests. Whether a personal loan helps or hurts your mortgage application comes down to specifics, not the fact that it exists on paper.
Why personal loans get a bad rap
Personal loans get lumped in with “bad debt” for a few reasons. They’re usually unsecured, which means there’s no asset behind them the lender could fall back on. That absence of security is part of why the interest rate tends to sit higher than a mortgage. On top of that, it’s often used for something that doesn’t build lasting value: a holiday, a wedding, general spending. That reputation isn’t baseless.
There’s also a harder, more regulatory reason balance matters. Since 2024, the Reserve Bank’s debt-to-income (DTI) rules have capped most owner-occupier lending at six times gross income. There are some exemptions, but they cover a small share of lending. This DTI limit is calculated on total debt, not monthly repayments. So the more debt you’re carrying, the less room usually remains under that ceiling, regardless of how well it’s managed.
But it’s also not the whole picture. DTI sets the ceiling, but most lending decisions happen well within it. That’s where the type and behaviour of a specific debt does the real work. Being unsecured and having a higher interest rate describes the loan type, not what it does to a specific application. A lender still looks past the label to what the loan is doing, which is a very different question.
What a lender actually cares about (purpose, repayment history, remaining balance)
What matters to a lender is what the loan was for. They also look at how consistently it’s been repaid, and how much is left owing. Those three things interact rather than standing alone. Purpose gives context for why the debt exists in the first place. Repayment history shows whether you’ve managed it the way you said you would. The remaining balance shows how much of that commitment is still live today.
A loan well into its term, with a clean record and a small balance left, tends to read differently. A loan that’s fresh, larger, and inconsistently paid reads the opposite way. It’s not really about age or size on their own. It’s about what those factors say together about how you’re managing the debt.
When a personal loan can quietly sink your borrowing power
What usually stops people from borrowing right away isn’t just the loan balance itself. It’s the monthly repayment. That figure comes straight off what a lender considers you can put toward a mortgage. Lenders call this your uncommitted monthly income, or UMI for short. A loan with a high minimum repayment can reduce your borrowing power more than people expect through the servicing test. That’s true even when the balance left is relatively small. Most lenders also build in a buffer here. They require a certain amount left over each month to allow for unexpected expenses, inflation, and rate rises. The more money that goes toward repaying the loan, the less is available for servicing. As a result, you may need to reduce how much you borrow to pass those servicing tests.
That’s because the servicing test looks at what’s left over each month, which is a separate check from your DTI position. A big balance with a low, manageable repayment might barely affect your servicing test, even though it still counts toward your DTI limit. A smaller balance with a high repayment can quietly eat into a large chunk of what you could otherwise borrow under servicing, even if it barely moves your DTI. The balance affects one test. The repayment affects the other. Both are checked every time, so neither one can be ignored just because the other looks fine.
When it barely moves the needle
On the other hand, a loan that’s nearly paid off often has surprisingly little impact. The remaining repayment is low, and there’s a clean history behind it. There simply isn’t much commitment left to weigh against your income. This is part of why two people who both “have a personal loan” can be in very different positions. Their loans might share a label, but not much else. Once a lender actually looks at what each one is doing month to month, the picture changes.
Your Personal Loan and Your Mortgage Application
This is the point where general information stops being useful, and your actual numbers start to matter. How much difference your specific loan makes to your mortgage application depends on several things. That includes the loan balance, the term remaining, your income, your other commitments, and the lender’s own criteria. Those criteria vary from lender to lender and even change over time. This isn’t something to work out from a blog post. It’s genuinely worth sitting down with someone who can look at your full picture. That’s a better starting point than guessing from a general rule that may not apply to you.
This article is part of my What’s Really Holding You Back? series on debt and mortgage approval. If you missed the earlier articles, the series introduction and good debt vs bad debt are the best places to start. Reading the whole series in order gives the full picture of how lenders weigh debt.
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. 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 loan and what it means for your mortgage application? 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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