Mike Pero Mortgages case study shows the larger your credit card limit, the less you'll be able to borrow to buy a house, regardless of what's owing on your card

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Did you know, you could have your mortgage borrowing power slashed just for having a credit card - even if you don’t use it or have always met your repayment obligations?

The issue is that when banks weigh up how you will service your mortgage, they will consider the fact you have the ability to take out as much debt as your card will allow you to.

In other words, they will look at the amount of debt you could potentially rack up, not the amount of debt you currently have.

Mike Pero Mortgages has done an experiment to illustrate this.

It filed the same mortgage application with a bunch of banks to find out the impact different credit card limits have on borrowing power.

It used a couple with a joint annual income of $130,000, a $100,000 deposit, clean credit history and no liabilities other than $600 a month rent, in its case study.

This is what it found:

Credit Card Limit $5,000 $10,000 $15,000 $20,000 $25,000
Reduction in Borrowing Power -$28,000 -$47,000 -$80,000 -$97,000 -$120,000

So a $10,000 credit card limit would reduce the amount this couple would’ve been able to borrow by $47,000.

Mike Pero Mortgages chief executive Mark Collins says: “Many first home buyers tend to think it’s okay to have credit cards as long as they don’t ever draw down on them.

“That’s not how the banks look at it. They have to consider that at any point you could draw down on the full amount, so they look at future potential credit card debt when calculating serviceability, rather than just the amount owing.

“Although there will be a relaxing of lending restrictions next year, the fact remains banks are still taking a very conservative approach to loan serviceability.

“People planning to seek mortgage borrowing in the New Year could help their cause by paying off credit cards and then getting rid of them completely.”

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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22 Comments

Don't already have a credit card? No problemo. Once your mortgage is approved, the bank will automatically invite you to apply for one lol!

More fees!

I'm a little embarrassed I wasn't aware of this

Same, I've got good credit, very well paid, but as I don't have a mortgage, my credit rating isn't as good as those with a mortgage. I thought the fact that I had an enormous limit on my credit card, never go anywhere near the limit and pay it off in full every month was a way to bump my credit score up.

Man it feels like being a first time job hunter, where you need experience, but no-one will ever give you a job to gain the experience because you've got no experience.

I'm refixing and one of the banks said I may have to decrease my credit card limit. I thought it was strange but didn't know it could have such an impact on borrowing power.

Well of course the limit on a credit card is a ready source of credit , and must be considered when assessing the indebtedness of a buyer .

I am surprised at the surprise of anyone who claims to be surprised about this .

Wasn't that way in 2012. But come the end of the interest-only period, it is!
(NB: I have my 'meeting' with the Bank re the Off-Set disagreement, next week. 100% Off-Set, and you still have to make the notional Interest Payments? Give me a break!)

BW ,

Many borrowers on interest only terms are going to have a sudden rude awakening and unanticipated cashflow pressure ...

I know. And, frankly, I'm one of them! It's not all that material to us, but to many, it will be. I just want the Bank to show me, somewhere, in the mass of documentation where it says " We will start using your credit surpluses from an Off-Setting Agreement to reduce the term of your loan, now" instead of "Off-Setting the actual weekly Interest amount." I know they'll say " But it's the same thing over the remaining term of the loan!!" But I don't reckon it is. As people age, TIME is as important to them as Outstanding Amount and Interest Rate, and all of those are part of a Loan Agreement.

BW

There is a total of at least $54.5bn of interest only loans secured by residential real estate - $28.7bn by residential investors, $25.8bn by owner occupiers. There will very likely also be some proportion of interest only loans in business loans and agricultural loans which total a further $76bn ($38bn agricultural, $38.7bn business loans) that will be secured by real estate (not sure what the percentage is) - I know that some large property investors are classified as business or commercial customers.

https://www.rbnz.govt.nz/statistics/s32-banks-assets-loans-by-product

I wonder how many of these are prepared to go from interest only to P&I. Many borrowers may still be assuming that they can extend the interest only period when they reach the interest only expiry date with the same lender or refinance with another bank lender or non bank lenders if need be (however non bank lenders only have $12bn worth of assets and will not be able to refinance the entire interest only loans amount issued by banks).

Some interest only borrowers may be caught unaware of having to go to P&I and the cashflow ramifications.

I fully expected to go to P&I after 5 years. The facility was just a standby one in essence, as it has been 100% OffSet from Day One. We were buying a replacement home; the Bank offered us a loan ( they always do/did ?!) and we thought "Fill your boots! You want to give us cash - we'll take it!".
What did surprise me was that the "i" bit is no longer OffSet by the OffSetting Funds after 5 years, but converted to shortening the duration of the loan. I have re-read the whole Loan Agreement from cover to cover several times, and can't see it mentioned where that's going to happen. Now, Contracts being Contracts, it's probabaly obscured in leaglese, but I reckon it's a chat worth having with the Bank, and we'll see what happens.

Aunty Florence said I can borrow $1m off her whenever I want at a good rate. Does the bank need to know about that to?

They have their mortgage if it turns belly up, everything else is none of their business.

ANZ made me cancel my card with a $10k limit as a condition of the mortgage. They then approved me for a new card with a $15k limit all before the mortgage was drawn down. The best bit was how they assessed my expenses for the credit card application . Since they don’t do joint cards, basically they halved all the expenses and used that as the basis of my expenses. The fact my partner couldn’t pay the other half wasn’t an issue.

DaveB1978 - exactly! It's also about capturing ALL your household purchases and skimming fees.

They waived the fees

Not for the merchants you buy from.

Why would we give ANZ a license to operate. They are either incompetent, or predatory. Either means we don't want em.

Or use your 80k of credit card limits to juggle balance transfers to achieve an 80k reduction of your mortgage and pay only 0% or 1.9% interest.

That'll be fun when the teaser rate ends and you're on the hook for the full 80k at 15% plus rates.

0% and 1.9% CC BT rates have been available for decades.
All the borrower needs to do is BT again every 12 or 6 months.
Far cheaper than the high floating mortgage rate of 5.95%.

CCCFA I think, if you have the credit card banks have to asses it into expenses. They often decline pensioners credit cards etc. now because they are asset rich and income poor. That's the problem with regulation, it needs to be written by people with a depth of knowledge and experience but not beholden to an industry of you just get blunt legislation with a lot of unintentional consequences.

How would you know that pensioners are regularly being declined credit cards? You wouldn't.

Mary Holm had a whole series of letters about it in the recent past. Tricky one, that. Credit cards require income, seems fair enough. But to get the good benefits under something like a platinum, you need a good limit. Surely, some scaling could be in order.