Why Paying Off Your Credit Cards Is Not Enough

Why Paying Off Your Credit Cards Is Not Enough

Getting your mortgage application together can require quite a bit of financial scrutiny. In order to figure out your serviceability, your potential lender will look deeply into your finances.

It’s a no brainer to take your credit card debts into consideration when applying for a mortgage. But what many people do not realise is that high credit card limits will not bode well for a home loan application.

If you have a high credit limit, you also have a high debt risk in the eyes of your lender. As the logic goes, there is no stopping you from boosting your credit card limit the day after your loan is approved.

“We have to take account of 3% of the total credit card limit, regardless of what the applicant owes,” says Homeloans Ltd Business Development Manager Sally Carmichael.

“If they had a $10,000 limit but they only owe $1000, we still have to assess $300 a month and that comes directly out of their liability. It does make quite a difference.”

Even if you haven’t put a cent on your credit card for the past five years, a high credit limit will negatively affect your serviceability. The best thing you can do is lower your credit limit, or cancel that credit account entirely.

“You need to pay out your credit cards and avoid having any other debt,” says Carmichael. “You need to be able to use your full amount of income.”

For those that have to pay off their credit account before dreaming of cancelling their liability, it is imperative that you pay your debt on time, according to your minimum repayments.

To discuss how your credit card limits may affect your maximum borrowing capacity contact us on 07 3911 1190 or use our contact form.

Why Paying Off Your Credit Cards Is Not Enough

How To Increase Your Borrowing Capacity

Maximising the amount a lender will hand over to you isn’t about trying to take on unmanageable levels of debt. It’s a matter of taking a few simple but smart steps that could mean the difference between toiling in that ‘fixer-upper’ or owning your dream home.

1. Shop around for lenders

Different lenders define income in so many different ways that it pays to use a finance broker who knows their way around what’s included and what’s not. One lender may allow share dividends as income, while another lender may not.

2. Shop around for the right mortgage

A good finance broker will help you choose the most appropriate mortgage. Even with one lender, your borrowing capacity can vary due to the loan type that you choose. If you add features such as a line of credit this can reduce the amount you can borrow.

3. Update your financial records

Try to have your PAYG income tax return as up-to-date as possible. This gives a better historical view of your income than just the two most recent payslips.

4. Check your credit rating

Check your credit rating before applying for a mortgage. Due to changes to the Privacy Act from 12 March 2014, your rating may not be as healthy as you thought. The national credit reporting agencies are Veda, Dun & Bradstreet and Experian. Find out more here.

5. Roll your debts into your mortgage

Unsecured debts such as personal loans and credit cards have expensive monthly repayments, and these monthly repayments cut in to the amount you can repay on a mortgage.

6. Reduce debt and credit limits

If you have unused credit cards with limits that are more than you need, then cancel those cards. Also, cancel any other cards – such as department store cards – that give you credit. Every $1000 on a credit limit – even if not spent – detracts from the amount you can borrow.

7. Investigate family pledges

Guarantor or family pledges may let your parents or family take out a second mortgage on a percentage of their own property to guarantee repayment to the bank if you fall behind.

8. Consider shared equity

Some lenders will give you a larger mortgage in return for a certain share of the profits when you sell. If you don’t make a profit, then the lender does not take a share.

9. Take a long loan

While 25-year mortgages have been the norm, that’s changing to 40 years in some cases. A longer loan cuts your repayments, but increases the total interest you will pay over the life of the loan.

10. Save more of the deposit

Lenders look for consistent saving records, preferably for more than six months. Saving more can be as simple – or as hard – as doing without that extra coffee, or taking your lunch to work each day. It all adds up and reduces the amount you need to borrow.

Remember, the first thing you need to do is understand your financial position and that starts with your mortgage broker. So why not give us a call on 07 3911 1190 to chat about your investment plans today?