15 Jan Don’t Just Pay off the Credit Cards
It seems like a no brainer, right? You are buying a home, so you’ll repay your credit cards to reduce your debt, but keep them active so you can buy some furniture or deal with emergencies even when you obtain your mortgage. Sadly this isn’t the best solution.
A lender will consider your credit card debts and the monthly repayments on those when you apply for a mortgage. But what many people do not realise is that credit cards with a zero balance can also impact a lender’s assessment of what you can afford to borrow.
Lenders consider you to have a high debt risk where you have a high credit limit. A logical conclusion to draw is that there is no stopping you from building up debt on your credit card the day after your loan is approved. Say, on furniture to fill that new house.
The majority of lenders require brokers to take in 3% of their credit card limits as a monthly repayment.
For example, if you have a $10,000 credit limit on a credit card, the lender would take away $300 per month (i.e. 3% of the credit limit).
From this, it can be deduced that if you haven’t put any money on your credit card for the past five years, a high credit limit will negatively affect your serviceability; $300 per month off a mortgage repayment means quite a bit over the life of a loan. In fact, being able to repay an extra $300 each month on a 30-year $500,000 loan at 5.5 per cent interest will mean paying it off 5 years faster, and saving approximately $100,000 on the total cost of the loan. Alternatively, it may mean that you are able to borrow an extra $50,000.
The best thing you can do is lower your credit limit (should you still need the card) or cancel your credit card entirely if you are able.
For those who have to pay off their credit account before dreaming of cancelling their liability, it is vital to make those payments on time to avoid negatively impacting your credit history.
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