Even if you don’t have any loans or debts, having a credit card might be enough to significantly reduce your borrowing capacity.

The reason why a credit card can be a hindrance to your ability to borrow money, is that lenders assess your credit card on the overall limit, not on how much you currently have in credit card debt.

Even if you’ve never reached your credit card limit since you’ve had the credit card, many lenders will assess a credit card as if it is maxed out. For example, if you have a credit card with a limit of $10,000, the lender is likely to assess your debt based on around 3% of this total amount per month.

This monthly amount, which in this case would be $300, is added to your ongoing expenses, with the result that your overall borrowing capacity is reduced. With a credit card limit of $10,000, that could mean a $75,000 reduction in borrowing capacity, which is significant and can quickly limit the number of potential properties a first home buyer has access to.

 

Assessing Your Situation

Lenders do not only focus on what your credit card limit will do to your borrowing capacity. They also take other factors into consideration!

One of the most important elements of any debt, in the eyes of a lender, is your track record of making repayments. If you continually miss payments and increase your debt levels, that doesn’t bode well in the eyes of a bank.

Similarly, if you are living off your credit card, and are one pay cheque away from not just missing a payment, but also missing your rent, then that doesn’t make you look overly appealing in their eyes.

It is important to understand that, with the implementation of Comprehensive Credit Reporting (CCR), lenders have incredibly detailed data on your spending habits, drilling down to how early or late you pay off your debts, or other bills.

 

Credit Cards Are Not All Bad

Now that we understand the impact credit cards have, it’s also important to note, that having a credit card is not necessarily a bad thing in the eyes of a bank.

As mentioned, how you manage your credit cards is far more important than the fact that you have them.

Lenders like to see that you are responsible with money. In fact, if you have a credit card and manage the credit very well, you will be looked upon far more favourably than someone who doesn’t have a credit card at all.

Whether or not you get rid of your credit cards to help you get a home loan really comes down to a few key factors.

• If you have a huge credit card limit that you simply don’t need, it might not be worth it. You could consider reducing the limit to help your application.
• If you have a poor track record of making payments or living off your credit card, it might be worth improving your money management skills.
• If your application is very tight, then your mortgage broker will be the person best suited to help you decide whether you need to get rid of your credit card.

If you’re reliant on your credit cards, take a step back and assess your personal financial and living situation and get that in order before you start the home loan application process.

If you’ve already got a home loan, then you should consider refinancing, to take advantage of the revised low cash rate and to make sure you’re getting the very best deal you possibly can.

However, there are also several other benefits to refinancing.

Better Interest Rates

The first thing to understand is what exactly it means to refinance. Basically, refinancing is just taking out a new home loan on the same property.

The first and most obvious reason to do that is to get a lower rate of interest. Lower interest rates mean lower mortgage payments, which can mean thousands of dollars being saved over the lifetime of your home loan.

A number of lenders offer great introductory rates when you take out a loan with them. However, unlike with other industries, you’re not rewarded by sticking with one lender for the long-term. In some cases, it’s the opposite. Those who have not reviewed (or refinanced) their loans can get stuck with far worse deals than necessary.

We must remember that banks and lenders are businesses and sometimes it’s far more valuable to attract new clients than worry about the ones’ you’ve already got. This is where a good mortgage broker can really help you with sifting through the fine print on suitable loans.

Better Loan Products

Back in our parents’ day, it was really just a matter of taking out a principal and interest loan and paying it off over the next 30 years. Fortunately, things have changed for the better and now lenders have a host of great products that can really save you money on your home loan.

A great example would be a 100% offset account attached to your mortgage. An offset account is a transaction account meaning you can use it for everyday things. However, because it is linked to your mortgage it attracts the same higher rate of interest as your mortgage.

More accurately, it saves you interest, in that you effectively only pay interest on the difference between your outstanding loan and your offset account balance.

An offset account can really supercharge your progress if you park your spare money in there and use smart money management techniques.

Access to Cash

If we’ve learnt anything during the COVID crisis, it’s that have having some money tucked away for a rainy day is important.

Fortunately, if you’re a homeowner who has owned their property for any length of time you might very well have built up some equity in your property. That’s certainly the case for owner-occupiers and investors in large parts of the east coast, particularly in Sydney and Melbourne who have seen median homes values rise dramatically in the last decade.

By refinancing, it’s possible to access that equity and draw it out as cash. That money can then be used to buy another property as an investment, or as required.

It’s quite possible to access equity and leave it in an offset account. That way it’s not costing you anything but it’s there if you need it. Again, speaking to a mortgage broker will be the best way for you to find out what you can do, given your individual circumstances.

Consolidate Debt

Not all debt is good debt. When you buy a house to live in or as an investment, that’s an example of good debt.

The asset you’re purchasing has a high likelihood of appreciating in value over a long period of time, which will leave you well placed.

Using credit or a loan to buy things that do not appreciate, like a new car or online shopping, will get you into ‘bad debt’. These things will not only depreciate in value almost instantly, but the debt comes with a high rate of interest.

High-interest debt not only weighs heavily on your borrowing capacity, but it is expensive to pay back. An option when you refinance is to roll some of these debts into your home loan and capitalise on the lower rates of interest.

This is a great time to be borrowing money and it hasn’t been this good since the 1950s. With the economy facing a short-term downturn, it’s more important than ever to have access to cash for a rainy day. There’s plenty of additional benefits to refinancing and a mortgage broker will be able to get you on the right track.