The Secret: How to boost your borrowing power
The dream of owning a home is slowly turning into a nightmare for some. Not only is the interest rate the highest in a decade but rumors that another interest rate rise could well be on the cards is pushing people further away from realizing their dream.
Do you feel that buying a property is out of reach? Well, you are not alone. More than twenty million Australians are facing a new dilemma. With the latest drama of sub-prime mortgage defaults in the U.S. still unfolding, it comes as no surprise that lending by institutions here will continue to be a bit more stringent and repayment ability scrutinized more closely.
Unfortunately, home buyers have little or no control over many of these changes, but they can influence or impact their buying power.
Here is a little secret on how you can better your chances of getting that loan for your dream home!
Step 1 Lower your credit card limit| Reducing your total credit card limit from $20,000 to $10,000 will increase your calculated monthly disposable income by $300, which have the same effect of having a net pay rise of $3,600/annum |
Australians love credit cards. We have nearly 13.5 millions credit card accounts in the market, with an average credit limit of over $8,000. The unprecedented increase in credit card debt has increased household debt, and Australia now has an average debt of $3,000 per credit card. Credit cards have become a convenient, everyday tool for managing consumer finance.
Many astute investors may be aware that even if you don't have any debt on your credit, the fact that you have a high limit on your plastic will reduce your borrowing capacity. Mortgage lenders will always assume that a credit card is a loan that is available for you to use at some stage of your life. This is why lenders always ask for "total combined limit on your credit cards" instead of "total debt on your credit cards" when you complete a mortgage application.
Then the next question would be: how do lenders determine the portion of your net disposable income which has to be put aside for your credit card debt? With minimum monthly repayments on credit cards ranging from 1.5% to 5%, most lenders will use 3% of your total credit card limit as the debt commitment that is attached to your loan application.
Table 1. Impact your total credit card limit has on your calculated net disposable income
| CARDS | CARD LIMIT | MIN. MONTHLY REPAYMENT % | INCREASE IN CALCULATED MONTHLY DISPOSABLE INCOME IF ACCOUNT CLOSED |
|---|---|---|---|
| EVERYDAY CARD | $20,000 | 2.50 % | $500 |
| STORE CARD | $10,000 | 2.75 % | $275 |
| GOLD CARD | $20,000 | 3.00 % | $600 |
| Source: www.canstarcannex.com.au | |||
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