When we do new applications, we get asked all the time “why does the bank care about my credit card limit if I don’t have a balance on it?” or “why do they care about short-term interest free lending?”...Greg's got the answers in the video below, or read on for more info.
Firstly, credit cards…
Credit cards are a popular product and if you are good with them they can have some real benefits but unfortunately they do impact your serviceability and when applying for a home loan.
Even if you are one of those people who are really good with your credit card i.e. you pay it off monthly, avoid interest etc the bank still sees the full limit of the card as a liability and has to take that into account when calculating your servicing ability.
Basically the bank wants to know that your credit card won't go and be maxed out once you’ve taken out your home loan, putting yourself in a position where you are struggling to service all your debt. In some cases the bank may ask for a reduction on the limit of your credit card or to close it completely. Either way, the team at My Mortgage can look at your options before submitting your application.
So what about interest free loans?
Interest free loans are also a good tool if you’re good with your money and plan on paying down that debt over the interest free period. However, if you are part way through paying down an interest free loan when you apply for a home loan this will still be a liability and affect your serviceability.
In this case, the bank may request that this debt is cleared. Once we do that, we no longer need to attribute any income towards paying that debt down which will give you better serviceability.
The most important thing to remember is that the less debt you carry (including credit card limits, interest free loans, Gem Visa, Q Card etc) the more attractive you are to the bank. If you’re having trouble getting your home loan because of some of these debts, talk to the team at My Mortgage so that we can get you into the best position to get your home loan approved!