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.”