Your credit limit affects your borrowing power
Your credit card limit play a large role in determining how much money you can borrow come time to apply for a mortgage, did you know that?
Regardless of how much debt you have accumulated on the cards, the banks will still hinder your borrowing power based on the fact that you total credit card limits ‘could’ be used at some point, in turn lessening your ability to meet their repayments should you ever accumulate debt on those credit cards.
Have you ever tried using a ‘how much can I borrow?’ calculator and noticed that they ask you for your ‘total combined limit on your credit cards’ instead of ‘how much debt do you have on your credit cards’?
This shows that the banks assume any credit limit, no matter how big or small – is potentially a line of credit that could be used at some stage in your life and will directly impact your mortgage repayment ability in their eyes.
How do lenders determine your monthly credit card repayments if you do have debt?
If you are in the position of having debt on the aforementioned credit cards, banks will have to assume your repayment rate and percentages to assess how much of your income it will eat up.
Given that most cards average between a minimum of 1.5% to 5% repayments per month, most banks assume you will have a repayment rate of around 3%.
Increase your borrowing power
According to CanstarCannex, if you have a card with a $20,000 line of credit on it and a bank assumed 3% minimum repayment – your monthly disposable income will be lessened by $600. That is $7,200 a year that the banks believe you won’t be able to repay from your income.
Now imagine if you are like many people and have numerous credit cards? Your borrowing power will be significantly less and it may make the difference between buying your dream home and buying an average home.
Although proof of being able to handle credit lines is vital for your credit history, I personally will be getting rid of nearly all of my credit cards that are sitting there idol in favour of just keeping one card with a small ‘safety net’ of money available to me, perhaps $500.
I want the ability to borrow as much as I can handle safely with my current salary, not what the banks think I can handle because of some idol credit cards.
What other factors affect your borrowing power without knowing?
We want to compile a list of comments with people’s suggestions on how to increase borrowing power and likely hood of being accepted for a mortgage. Leave a comment below!
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