We don’t often stop to think about how credit cards affect our borrowing capacity when it comes to applying for a home loan. Why should we, we pay them off every month, right !!!
What you are about to read will change your view on this forever. This article has been provided by our guest contributor, Mortgage Broker, Taras Mencinsky from Runmore Loans.
CREDIT CARDS and BORROWING CAPACITY
Credit cards can affect your borrowing capacity significantly. And that’s because the liability banks associate with credit cards has nothing to do with your monthly debit balance but everything to do with your credit limit. The rationale the banks use is as follows. You can have a credit card with no debt today, but a $50,000 credit limit, and if tomorrow you buy a car with it, suddenly the limit is reached, and you end up paying 19.99% interest on the debt. Fanciful I know, but rest assured, this is how the banks treat credit card limits. That’s why, for every $1,000 of credit card limit, your borrowing capacity is reduced by $4,500 to $5,000. So if you have a $10,000 limit credit card you hardly use this effectively reduces your borrowing capacity by up to $50,000! Therefore, review your credit card limits often and reduce and/or cancel them if you don’t use them.
The increased scrutiny that banks are placing all mortgage applications under has a potentially significant impact on borrowing capacity. Borrowing capacity, also known as maximum serviceability is, along with available security, the two main pillars of credit assessment for lending. Remember these words, Security and Serviceability, as every tip is based on making your application present in the best possible light in respect to these two terms. With regard to servicing, the equation is pretty simply, on the face of it. Servicing is the ability to make loan repayments with your existing income and expenditure. With that in mind, all banks assess loan repayments on a measure that includes principle and interest repayments over the loan term (normally 30 years) at their nominal assessment rate (typically 7.5% to allow for interest rate rises). Income may seem obvious, but not all income is treated the same. Income from commissions, bonuses, overtime, allowances, rental income, investment or other sources is treated differently to PAYG income, but that’s for another newsletter. Similarly, expenditure may seem simple as in “I spend what I earn”, but I would counsel against giving that as an answer. Expenditure is assessed over many different expense categories, and one of them is other financial liabilities, such as personal loans, car leases, child support payments, HECS/HELP debt, other home loans and credit cards. Most of these debts you can’t change, unless you pay off the car loan, personal loan or HECS/HELP debt for example. In most cases however this isn’t possible. The one liability you have control over though is your credit card.
WHAT CAN I DO TO GET A GREAT LOAN?
Speak to me – your no cost personal broker. Runmore Loans is individually owned and not part of a franchise group. We don’t offer in-house funding options and we don’t preference any lender. My recommendations are based solely on what’s best for my clients. If you are looking for impartial advice, based on experience and knowledge then talk to me.
MOB: 0414 636 211