REDUCE CREDIT CARD LIMIT TO RAMP UP BORROWING POWER

Reception • Feb 19, 2018

Are you looking to enter the property market or upgrade your existing home, but it feels out of reach?


Many of our clients are keen to understand what influences their borrowing power and how they can improve their borrowing capacity to be a step closer to securing their next home or investment property. Did you know your credit card limit directly impacts the amount you can borrow? A simple change can make it one of the quickest ways to increase your borrowing capacity.


Lenders don’t just look at your outstanding credit card and minimum monthly repayments when assessing your loan application. They look at what your total repayments would be if you used the credit card limit in full, even though that may not be the case. The lenders’ rationale is that you have the ability to utilise the limit, and so they must take this into account when determining your repayment serviceability.


If you have significant credit card limits not being used, it could be of great detriment to your borrowing capacity.



How much can this impact your borrowing capacity if you are trying to purchase a property?


Let’s look at the following scenario:

Credit Card Current Balance Card Limit Min. monthly repayment on balance Min. monthly repayment on credit limit
Card 1 $2,500 $10,000 $75 $300
Card 2 $2,000 $7,500 $60 $225
Total $4,500 $17,500 $135 $525

When assessing your loan, the lender calculates your monthly financial commitment on the maximum credit limit of $17,500 (equating to $525 per month) and NOT the current balance of $4,500 (equating to only $135 per month). The difference of $390 per month could be used as repayments towards your new property loan. This $390 per month could equate to an additional borrowing capacity of approximately $63,500 (based upon a 25-year loan at 5.5% p.a. interest rate with P & I repayments).


Importantly, interest-free cards will also reduce your borrowing power. Even though many cards are interest-free, the lender will assume a monthly commitment against the limit of the card (generally at approximately 2.5% per month) to allow for the amortisation of the principal.



The impact of reducing your credit card limit


For every $1,000 that you reduce your credit card limit, your monthly available income will be increased by between $30 and $50. This generally equates to an increase in borrowing capacity of approximately $4,100 (based upon a 25-year loan at 5.5% interest rate).


What can you do?


  1. Cancel unnecessary credit cards and store cards to consolidate your credit card debt. This will reduce your monthly financial commitments and free up your income for other repayments. Do you really need more than one credit card if it is directly impacting your borrowing capacity?
  2. Reduce the limit on your cards to the minimum practical amount for your personal situation.


Before you do anything, please call our office today to determine if reducing your credit limit will boost your borrowing power. We will assess your personal situation and determine the best way to maximise your borrowing capacity.

Disclaimer: This article is generic in nature. All finance and investment decisions should be considered wisely and based on your personal and financial circumstances. Seek proper advice before committing to any course of investment action. This is not deemed as advice.

05 Oct, 2023
The Power of Pre-Approval: Your Key to Home Buying Success
01 Aug, 2023
Navigating the World of Mortgages: What borrowing capability do you have? Deciding to buy a house is an exciting milestone, and we're here to accompany you through the intricate world of mortgages. With the changes to interest rates that have happened over the last twelve months, it's essential that we are prepared and approach borrowing with a healthy attitude, as your choices now will have long-lasting implications, so let's ensure you're well-prepared for this homeowner journey. What should I consider when considering my borrowing limits? First, let's figure out how much you can borrow without sacrificing your peace of mind and daily joys. The key here is to measure your income against your expenses, including the potential mortgage repayments. A general rule of thumb: try to keep your mortgage repayments to no more than 35% of your gross monthly income. When it comes to borrowing generally, the higher your deposit and the higher your income, the more they should be willing to lend. The good news is we have more flexibility as mortgage brokers than the big banks, so we can look at your circumstances closer. Now, let's discuss some essential factors to consider when figuring out your borrowing limits. How much debt can you handle? Think about your lifestyle and what you're willing to give up versus what's non-negotiable. Be realistic about your dream home. Start with something affordable and gradually work your way up as your earnings grow and your equity increases. Think about the future. Are you planning to start a family, change jobs, or experience significant life changes? Factor those possibilities into your calculations. Keep an eye on interest rates and consider how further rises might affect your ability to make repayments. Reminder; A reminder that when purchasing a property, you will also need to factor in further expenses, such as, pay stamp duty, pest & building inspections, conveyancer fees, application fees, council rates, possible strata or body corporate costs, and utility bills to factor in. In Summary We'll help you evaluate your financial situation, research and compare over thirty lenders and loan options, and gather the necessary documentation to help you whether you are purchasing your first home or refinancing. What should I do next? Our dedicated team is committed to nurturing your financial well-being and helping you achieve a stronger and more secure future. Call our office on (03) 8657 8664 to organise a time to chat, and we also invite you to take advantage of our free resources by heading to our website. https://www.futurefinancegroup.com.au/
By Bree Jones 19 Jun, 2023
At Future Finance Group, we understand that financial hardship has become a pressing concern for many homeowners across the country, including Melbourne. We want to help you explore the benefits of refinancing your mortgage. By assessing the right time to refinance and understanding the steps involved, we can guide you to potentially save money, access improved loan terms, and secure a more favourable financial future. What are the Benefits of Refinancing? During these challenging times, refinancing your mortgage can bring meaningful advantages. Firstly, it may allow you to take advantage of lower interest rates, reducing your monthly mortgage payments and offering much-needed relief. Additionally, refinancing allows switching from a variable-rate to a fixed-rate mortgage, ensuring stability and protection against future rate increases. By consolidating high-interest debts, you can streamline your finances and gain more control over your monthly obligations. Also, refinancing can unlock equity in your home, providing funds for essential expenses or other financial goals. Assessing the Right Time to Refinance Working out when to refinance can be challenging, mainly because we do not know what the future will bring. We are here to look at your personalised options and work with you to ensure your financial security. We can consider many factors, such as your credit score, home equity, and employment stability, to give you informed options. Steps Involved in Refinancing and Potential Cost Savings : We are here from the beginning to the end and strive to simplify the refinancing process for you. We'll help you evaluate your financial situation, research and compare over thirty lenders and loan options, and gather the necessary documentation. Our ultimate goal is to help you secure better terms, rates, and long-term cost savings to ease the pressure on you and your family. In Summary In these challenging times, exploring refinancing options can provide much-needed relief and open up financial opportunities for you as a homeowner. What should I do next? Our dedicated team is committed to nurturing your financial well-being and helping you achieve a stronger and more secure future. Call our office on (03) 8657 8664 to organise a time to chat, and we also invite you to take advantage of our free resources by heading to our website. https://www.futurefinancegroup.com.au/
MORE POST
Share by: