Aspiring property buyers may want to consider paying down debt before applying for a mortgage, with new analysis revealing loans are holding back families from the Australian dream.

A home buyer with an average income could limit their first-home budget by tens of thousands of dollars due to unpaid debts, including student, car and credit card loans, according to figures published by comparison firm Canstar on Monday.

The analysis found a hopeful buyer with an average HECS loan and $94,000 in annual income could have about $57,000 less available to them to buy their first home.

A credit card with a $10,000 purchase limit could reduce the approved loan size by up to $46,000, Canstar found, while a $30,000 car loan could put a massive $75,000 dent in the ambitions of a home buyer.

With property prices starting to rebound despite decade-high interest rates, Canstar’s Effie Zahos said those saving should think about paying down their debts before looking to buy a property.

“While aspiring home buyers have little control over rising property prices, they can take a close look at their expenses and debts that could be affecting their borrowing power,” Ms Zahos said.

Limited options

In a particularly bad scenario, an average, single-income borrower with student loans, a car loan and a $10,000 credit card limit could reduce their $372,000 loan budget by up to $178,000 – or about 47 per cent.

This is because banks take into account a customer’s loans before approving a mortgage, with the size of the loan determined by their debt-to-income ratio and repayment capability.

“Even with a 20 per cent deposit, they would be in the market for a $242,500 property, which doesn’t leave them a lot of options,” Ms Zahos said.

She said that even a fairly cheap market – located in regional South Australia – has a median price of $278,549, according to CoreLogic.

Borrowing power will differ between lenders, so these figures are best used as a guide, with the general principle being that higher debts and expenses leads to a lower loan budget.

That means reviewing bills and cutting discretionary expenses are good ways to squeeze more out of your home loan pre-approval, while paying down outstanding debt can be just as important as saving for a deposit.

It’s particularly important right now because the property market is at a turning point, with prices starting to rebound despite high interest rates – creating a double-whammy for first-time buyers.

And the situation is just as bad for couples, according to Canstar’s  analysis, which found that a full-time/part-time duo earning an average wage has an estimated loan budget of $609,000.

Ms Zahos said the figures are particularly important to consider for those thinking about starting a family, because the increase in everyday expenses could significantly affect debt limits.

It’s estimated a first child could reduce borrowing power by $20,000, compounding with a second or third child.

“Getting a home loan can be a little trickier for families,” Ms Zahos said.

“While you’d assume applicants can effectively double their borrowing power by combining incomes, typically home buyers with dependents have more expenses, which can offset even the strongest of incomes.

“The key is to be able to reduce your expenditure by as much as possible when applying for a loan. It’s also important that you’re able to sustain those cost-cutting methods to avoid mortgage stress down the track.”