Managing Your Credit Cards

Written by Michael McAlary

Credit Card Limits and Home Loan Serviceability Calculations

Did you know that your borrowing capacity can be adversely impacted by the total of your credit card limits?

Why you need to to maximise your borrowing capacity?

When assessing a home loan application a lender will look at two important factors:

  • Loan to ValuationRatio (LVR). This ratio is the percentage of thetotal amount of the home loan required compared to the current property value; and
  • Loan Serviceability Ratio where the lender considers the applicant’s ability to make the proposed monthly home loanrepayments given their existing commitments.In determining the Loan Serviceability Ratio lenders consider an applicant’s income and living and other expenses e.g. car loan.The specific parameters for these can vary between lenders.

Many potential home loan customers are unaware that the total sum of their credit card limits is used by lenders when assessing a customer’s ability to service their home loan. This is regardless of whether the credit card(s) is paid off in full each month or if it only has a zero or small balance.  The treatment of credit card limits can vary slightly from lender to lender therefore impacting on the maximum loan that may be available to you.

At Wealthmaker Financial Services we regularly advise our customers to reduce their credit card limits, and if possible the number of credit cards, as a means of improving the Loan Serviceability Ratio. It is interesting to note that most of our customers take this advice on board as they realise it is also an important step in the wealth creation process (refer article on Debt Management).

The lender ensures the borrower has not overcommitted as it is not in the interests of either party if the borrower cannot afford to make their home loan commitments or in doing so experience substantial financial hardship.

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