Credit cards can kill your borrowing capacity and it could be in your best interest to reduce these limits before applying for a home loan says experience mortgage broker Theo Angelopoulos.
Many applicants believe that because you pay them off or if there is only a small amount owing on them that it doesn’t make a difference. In reality all credit card debts and limits need to be taken into consideration when applying for a home loan. What many people do not realise is that high credit card limits greatly affect your borrowing capacity.
Most banks these days need to take into account roughly 3% of the total credit card limit as a monthly ongoing liability, this is regardless of what the applicant owes on the card when calculating how much you can borrow.
For e.g. if you had a $15,000 credit card limit the banks will assess this as a liability as an ongoing $450 a monthly repayment. Having a $450 ongoing liability when applying for a home loan greatly affects how much you can borrow. To put this liability into comparison it’s like repaying a mortgage of $80,000 over a 30 year loan term with an interest rate of 5.5% ($454 per month).
If you haven’t put a cent on your credit card for the past year or if you have a high credit limit the best thing you can do is lower your credit limit, or cancel that credit card entirely before applying for a home loan.
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